Earnings Beat In Cards For Merck’s Q2?

Merck (NYSE: MRK) is scheduled to report its Q2 2021 results on Thursday, July 29. We expect the company to likely post revenue and earnings above the consensus estimates, led by continued expansion of Keytruda, and a recovery in the company’s vaccine sales, primarily Gardasil, as well as the animal health business. Merck should see an overall pickup in demand due to an increase in hospital visits with Covid-19 vaccination rates going up steadily.  We expect the company to navigate well based on these trends over the latest quarter.

Furthermore, our forecast indicates that Merck’s valuation is $99 per share, which is 29% above the current market price of around $77. Our interactive dashboard analysis on Merck’s Pre-Earnings has additional details.

(1) Revenues expected to be above the consensus estimates

Trefis estimates Merck’s Q2 2021 revenues to be around $11.9 billion, compared to the $11.5 billion consensus estimate. For Merck in Q2 2020, sales were down nearly 8%, given the lockdowns due to the spread of Covid-19. This is despite the fact that its top-selling drug – Keytruda – continued to expand with 29% y-o-y growth. Over the last year or so, Keytruda has continued to gain market share, and garner more regulatory approvals for expansion of its usage. Keytruda’s sales alone stood at $3.9 billion, reflecting a 19% y-o-y growth, and accounting for one-third of the company’s total sales.

Now that nearly half of the U.S. population is fully vaccinated, and on the international front, most of the countries have undertaken large-scale vaccination programs, the healthcare institutions now have more resources to address non-Covid related patient visits, as well as address the elective surgeries that were postponed earlier. People are also more confident heading out, compared to the lockdowns in Q2 last year, implying a rebound for Merck’s business.

However, the company’s Q1 2021 results were impacted by lower vaccine sales with Gardasil sales falling in mid-teens. It will be interesting to see how Gardasil sales trend in Q2, given the rise in Covid-19 vaccination rate. In Q2 2020, Gardasil sales were down a large 26% to $656 million, and we expect a sharp jump from those low levels. For perspective, Gardasil sales stood at $917 million in Q1 2021.

Lastly, Merck’s animal health business has seen strong growth over the recent quarters, led by a rise in pet ownership in the U.S., especially during the pandemic. Animal health sales are likely to remain strong in the near term for Merck. Our dashboard on Merck Revenues offers more details on the company’s segments.

2) EPS likely to be slightly above the consensus estimates

Merck’s Q1 2021 adjusted earnings per share (EPS) is expected to be $1.48 per Trefis analysis, slightly above the consensus estimate of $1.44. Merck’s adjusted net income of $3.6 billion in Q1 2021 reflected an 8% fall from its $3.9 billion figure in the prior-year quarter, due to margin contraction, led by a rise in operating costs. However, as the sales improve, margins are expected to rebound going forward. For the full year 2021, we expect the adjusted EPS to be higher at $6.40 compared to $5.94 in 2020.

(3) Stock price nearly 30% above the current market price

Going by our Merck’s Valuation, with an EPS estimate of $6.40 and a P/E multiple of 15x in 2021, this translates into a price of $99, which is nearly 30% above the current market price of around $77. In fact, at the current market price of $77, MRK stock is trading at just 12x its 2021 EPS estimate of $6.40. The 12x figure compares with levels of over 17x seen in 2018 and 2019, and a 14x figure seen as recently as late 2020. We continue to believe that MRK stock is undervalued and it can offer high returns going forward.

Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year.

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