We believe that AbbVie stock (NYSE: ABBV) is currently a better pick than its peer Merck stock (NYSE: MRK), given its better growth prospects. Both companies are comparable in valuation, with AbbVie trading at 4.2x, trailing revenues, and Merck trading at 3.9x.
If we look at stock returns, Merck’s 14% growth this year is much better than the 0.2% return for AbbVie stock and -16% returns for the broader S&P 500 index. There is more to the comparison, and in the sections below, we discuss why we believe ABBV stock will offer better returns than MRK stock in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis of AbbVie vs. Merck: Which Stock Is A Better Bet? Parts of the analysis are summarized below.
1. AbbVie’s Revenue Growth Has Been Better In Recent Years
- Both companies posted sales growth over the last twelve months. Still, Merck’s revenue growth of 30.2% is higher than 6.7% for AbbVie.
- However, if we look at a longer time frame, Merck’s sales grew at an average growth rate of 5.3% to $48.7 billion in 2021, compared to $42.3 billion in 2018, while that of AbbVie grew at 20.6% to $56.2 billion in 2021, compared to $32.8 billion in 2018.
- Merck, over the recent years, has benefited from the label expansion of Keytruda and strong demand for vaccines, primarily Gardasil.
- AbbVie is best known for its blockbuster drug – Humira – used to treat rheumatoid arthritis and Crohn’s disease, among others. Humira garnered a whopping $20.7 billion in 2021 sales, reflecting a 4% y-o-y growth. Now, Humira’s biosimilar has already hit the European markets, weighing on the company’s international sales. The biosimilars are expected to enter the U.S. next year, likely resulting in a significant drop in Humira sales over the coming years.
- That said, AbbVie is prepared to combat this biosimilar impact with its Allergan acquisition in 2020, giving it access to Botox, a multi-billion dollar product. Furthermore, its relatively new drugs – Skyrizi and Rinvoq – used to treat plaque psoriasis and rheumatoid arthritis are gaining market share. For perspective, these three products garnered $9.3 billion in 2021, reflecting a 94% y-o-y growth.
- Our AbbVie Revenue and Merck Revenue dashboards provide more insight into the companies’ sales.
- Looking forward, AbbVie’s’ revenue is expected to grow faster than Merck’s over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 8.6% for AbbVie, compared to a 1.6% CAGR for Merck, based on Trefis Machine Learning analysis.
- Note that we have different methodologies for companies negatively impacted by Covid and those not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
2. Merck Is More Profitable And Offers Lower Risk
- AbbVie’s operating margin of 30.3% over the last twelve-month period is slightly lower than 33.0% for Merck. However, historically, AbbVie has seen better operating margins.
- This compares with 39.0% and 18.7% figures seen in 2019, before the pandemic, respectively.
- AbbVie’s free cash flow margin of 40.0% is better than 33.2% for Merck.
- Our AbbVie Operating Income and Merck Operating Income dashboards have more details.
- Looking at financial risk, Merck is placed better. Its 14.3% debt as a percentage of equity is lower than 30.2% for AbbVie, while its 9.7% cash as a percentage of assets is higher than 7.0% for the latter, implying that Merck has a better debt position and more cash cushion.
3. The Net of It All
- We see that AbbVie has demonstrated better revenue growth and profitability over recent years. On the other hand, Merck has a better debt position and more cash cushion, implying lower financial risk.
- Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we still believe AbbVie is currently the better choice of the two.
- The table below summarizes our revenue and return expectations for AbbVie and Merck over the next three years and points to an expected return of 33% for AbbVie over this period vs. a 14% expected return for Merck stock, implying that investors are better off buying ABBV over MRK, based on Trefis Machine Learning analysis – AbbVie vs. Merck– which also provides more details on how we arrive at these numbers.
Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at 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||-3%||-16%||79%|
|Trefis Multi-Strategy Portfolio||-3%||-16%||236%|
 Month-to-date and year-to-date as of 8/30/2022
 Cumulative total returns since the end of 2016