Will Merck Stock Rise After Its Q2 Results?

Merck (NYSE: MRK) is scheduled to report its Q2 2022 results on Thursday, July 28. We expect the company to have a robust Q2, with revenue falling in-line and earnings expected to be slightly above the consensus estimates, driven by a continued uptick in sales of its key drugs, including Keytruda, Lagevrio, and Gardasil. That said, pandemic-induced lockdowns in China likely weighed on Gardasil sales growth in that region. Although we expect Merck to post an upbeat Q2, we find its stock to have little room for growth, as discussed below. Our interactive dashboard analysis on Merck’s Earnings Preview has additional details.

(1) Revenues expected to be in line with the consensus estimates

• Trefis estimates Merck’s Q2 2022 revenues to be $13.9 billion, aligning with the consensus estimate.
• The company’s overall revenue growth is likely bolstered by market share gains for Keytruda and Gardasil and its Covid-19 treatment – Lagevrio.
• Looking at Q1 2022, Merck reported revenue of $15.9 billion, reflecting a significant 50% y-o-y growth, partly due to a $3.2 billion sales contribution from Lagevrio.
• Merck’s top-selling drug – Keytruda – saw its sales rise 23% to $4.8 billion in Q1, while Gardasil sales were up a significant 59% to $1.5 billion.
• The company’s animal health business has also been doing well with 4% y-o-y gains in Q1, and the growth trend is likely to continue in the near term, given the rise in pet ownership in the U.S.
• Our dashboard on Merck Revenues offers more details on the company’s segments.

(2) EPS expected to be slightly above the consensus estimates

• Merck’s Q2 2022 adjusted earnings per share (EPS) is expected to be $1.73 per Trefis analysis, slightly above the consensus estimate of $1.69.
• Merck’s adjusted net income of $5.4 billion in Q1 2022 reflected a significant 84% rise from its $2.9 billion figure in the prior-year quarter, led by higher revenues and expansion of operating margins. The company’s SG&A and R&D grew only in mid-single-digits in Q1, compared to a 50% rise in total revenue.
• However, inflationary headwinds and supply chain constraints threaten margin expansion in the near term.
• For the full year 2022, we expect the adjusted EPS to be higher at $7.42, compared to $6.02 in 2021.

(3) MRK stock has only a little room for growth

• We estimate Merck’s Valuation to be $99 per share, which is only 10% above the current market price of $90.
• This represents a forward P/E multiple of 13x based on our EPS forecast of $7.42 in 2022 and aligns with the last three-year average of 13x for MRK stock.
• Now, if the company reports upbeat results, along with 2022 guidance better than the street estimates, it is likely that the P/E multiple will be revised upward, resulting in higher levels for MRK stock.