Merck stock (NYSE: MRK) reported its Q2 results last week, with revenue and earnings comfortably above ours and the street estimates. However, MRK stock has seen a fall of around 4% in a week, with rising concerns over the drug pricing bill. After the recent fall, we believe MRK stock has some more room for growth and may see higher levels, as discussed below.
Merck’s revenue of $14.6 billion in Q2 was up 28% y-o-y, and its EPS of $1.87 reflected a significant 3x growth. This compares with our estimates of $13.9 billion and $1.73, respectively. The revenue growth was led by higher sales of its blockbuster drug – Keytruda (up 26% to $5.3 billion) – and Gardasil (up 36% to $1.7 billion).
Given the upbeat results, the company raised its revenue guidance for the full-year 2022 to be in the range of $57.5 and $58.5 billion, including headwinds from the strengthening dollar. It also narrowed the earnings guidance to now be in the range of $7.25 and $7.35 on a per share and adjusted basis.
Overall, Merck’s Q2 results were solid, with market share gains for its key drugs. A decline in its diabetes portfolio was anticipated given it lost market exclusivity in China and will lose that for Europe next month. Merck is eyeing inorganic growth to expand its pipeline. It is reportedly in talks to acquire Seagen Inc. in a deal value that could exceed $40 billion. This acquisition, if successful, subject to regulatory approvals, will likely be looked at as a positive for Merck, enhancing its cancer drugs portfolio. Seagen’s key products are Padcev, Tukysa, and Adcetris, each a potential blockbuster drug that can help Merck post more robust revenue growth.
Given the recently announced results and outlook, we have updated our model and revised our estimates. We expect full-year 2022 revenue to be $58.0 billion, within the company’s provided range, but earnings to be $7.38, marginally higher than its estimates.
We estimate Merck’s valuation of $102 per share, reflecting a 15% upside from its current market price near $88, implying that investors may be better off using the recent dip to enter MRK stock for gains in the long run.
Our valuation is based on a forward P/E ratio of under 14x based on our earnings forecast of $7.38 on a per-share basis for full-year 2022. At its current levels, MRK stock is trading at under 12x its forward earnings, compared to the last three-year average of 13x, implying some more room for growth. We have allocated a slightly higher earnings multiple for Merck (compared to the levels seen in recent years) due to an expected rise in earnings over the coming years as its key drugs continue to gain market share.
While MRK stock looks like it has more room for growth, it is helpful to see how Merck’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Xylem vs. Merck.
Despite inflation rising and the Fed raising interest rates, Merck stock has risen 14% this year. But can it drop from here? See how low Merck stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.
|S&P 500 Return||1%||-13%||86%|
|Trefis Multi-Strategy Portfolio||4%||-10%||253%|
 Month-to-date and year-to-date as of 8/4/2022
 Cumulative total returns since the end of 2016