Pick Either Merck Stock Or Its Peer – Both May Offer Similar Returns

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We believe that pharmaceutical giants Merck stock (NYSE: MRK) and Pfizer stock (NYSE: PFE) will likely offer similar returns over the next three years. Although Merck is trading at a comparatively higher valuation of 4.9x trailing revenues vs.2.9x for Pfizer, this valuation gap can be attributed to Merck’s lower financial risk, as discussed below.

If we look at stock returns, Merck’s 37% growth in the last twelve months is much better than the 16% fall for Pfizer and -16% returns for the broader S&P 500 index. There is more to the comparison, and in the sections below, we discuss the possible stock returns for MRK and PFE in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of Merck vs. PfizerWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Pfizer Revenue Growth Is Better

  • Both companies posted strong double-digit sales growth over the last twelve months. Still, Pfizer’s revenue growth of 44.5% is higher than 27.8% for Merck.
  • However, if we look at a longer time frame, Pfizer saw its revenue grow at an average annual rate of 32.2% to $81.3 billion in 2021, compared to $40.8 billion in 2018, while Merck saw its sales grow at an average growth rate of 5.3% to $48.7 billion in 2021 vs. $42.3 billion in 2018.
  • Pfizer’s sales over the recent years were primarily driven by a very high demand for the Covid-19 vaccine. However, the demand for Covid-19 vaccines is also declining with a rise in the global vaccination rate. This will likely weigh on Pfizer’s revenue growth over the coming years.
  • Merck, over the recent years, has benefited from the label expansion of Keytruda and strong demand for vaccines, primarily Gardasil. Both of these products are seeing strong demand, with sales rising 23% y-o-y to $15.5 billion for Keytruda and a 31% uptick to $5.4 billion for Gardasil for the nine months ending Sep 2022. Both of these are expected to continue driving revenue growth for Merck.
  • Our Pfizer Revenue Comparison and Merck Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, revenue for both companies is expected to grow at a similar pace 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 1.6% for both Pfizer and 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.
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2. Pfizer Is More Profitable But Comes At Higher Risk

  • Merck’s operating margin of 30.7% over the last twelve-month period is slightly lower than 33.6% for Pfizer.
  • This compares with 36.2% and 18.7% figures seen in 2019, before the pandemic, respectively.
  • Merck’s free cash flow margin of 33.5% is slightly better than 26.6% for Pfizer.
  • Our Pfizer Operating Income Comparison and Merck Operating Income Comparison dashboards have more details.
  • Looking at financial risk, Merck is placed better. Its 10.8% debt as a percentage of equity is slightly lower than 13.8% for Pfizer, while its 11.4% cash as a percentage of assets is higher than 0.7% for the latter, implying that Merck has a better debt position and more cash cushion.

3. The Net of It All

  • We see that Pfizer has demonstrated better revenue growth, is more profitable, and is available at a comparatively lower valuation. 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 believe both Merck and Pfizer are likely to offer similar returns over the next three years.
  • The table below summarizes our revenue and return expectations for Merck and Pfizer over the next three years and points to an expected return of 9% for Merck over this period vs. a 13% expected return for Pfizer stock, implying that investors can pick either of the two for similar returns, based on Trefis Machine Learning analysis – Merck vs. Pfizer– which also provides more details on how we arrive at these numbers.

While MRK and PFE may offer similar returns,  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 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 37% in the last twelve months. 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.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Jan 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
MRK Return 0% 0% 89%
PFE Return -7% -7% 46%
S&P 500 Return 3% 3% 77%
Trefis Multi-Strategy Portfolio 7% 7% 236%

[1] Month-to-date and year-to-date as of 1/12/2023
[2] Cumulative total returns since the end of 2016

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