Merck Stock Looks Better Priced Compared To Its Sector Peer

MRK: Merck logo

We believe that Merck stock (NYSE: MRK) is currently a better pick than its peer Eli Lilly stock (NYSE: LLY), given its comparatively lower valuation of 4.7x trailing revenues vs. 10.5x for Eli Lilly. Although investors have assigned a higher P/S multiple for LLY stock owing to its pipeline potential, we believe this gap will narrow in favor of Merck. Merck’s revenue growth has been comparable with Eli Lilly over the recent years, and it is more profitable, as discussed below.

If we look at stock returns, both have seen strong growth, with Merck rising 43% and Eli Lilly’s 29% in the last twelve months, significantly outperforming the broader indices, with the S&P 500 index down 9%. There is more to the comparison, and in the sections below, we discuss why we believe MRK stock will offer better returns than LLY stock in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and profitability, in an interactive dashboard analysis of Merck vs. Eli LillyWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Merck’s Revenue Growth Is Better

  • Both companies posted sales growth over the last twelve months. Still, Merck’s revenue growth of 20.7% is much higher than 0.8% for Eli Lilly.
  • If we look at a longer time frame, Eli Lilly has fared slightly better, with its sales rising at an average annual growth rate of 8.7% to $29 billion in 2022, compared to $22.3 billion in 2019, while Merck’s sales grew at an average growth rate of 7.9% to $59 billion in 2022, vs. $39.1 billion in 2019.
  • Merck, over the recent years, has benefited from the label expansion of Keytruda and strong demand for vaccines, primarily Gardasil.
  • Keytruda alone garnered $21 billion in sales in 2022, growing at a solid 22% y-o-y. Gardasil accounted for $7 billion in sales last year.
  • Merck saw a $6 billion contribution from sales of Lagevrio – its Covid-19 antiviral pill – but its sales are expected to decline in 2023 and beyond. Some other drugs, including Januvia/Janumet, are also likely to see a slowdown in sales, with increased competition. However, Keytruda is expected to see continued market share gains in the near term, aiding the company’s top-line growth.
  • Eli Lilly’s revenue growth has been driven by continued market share gains for drugs such as Trulicity, Verzenio, Jardiance, and its Covid-19 antibodies. The company has secured U.S. FDA approval for its diabetes drug – Tirzepatide – which is expected to garner over $5 billion in peak sales.
  • Eli Lilly has a robust product cycle, including Alzheimer’s treatment – Donanemab – one of the most anticipated drugs with peak sales pegged as high as $10 billion. This is one of the key reasons for investor optimism in LLY stock, along with its recently approved type 2 diabetes drug – Mounjaro – with peak sales pegged at around $15 billion.
  • Our Merck Revenue Comparison and Eli Lilly Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, Eli Lilly’s revenue is expected to grow faster than Merck’s over the next three years, based on Trefis Machine Learning analysis.
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2. Merck Is More Profitable 

  • Merck’s operating margin of 30.6% over the last twelve-month period is better than 25.3% for Eli Lilly.
  • This compares with  18.7% and 21.8% figures seen in 2019, before the pandemic, respectively.
  • Merck’s free cash flow margin of 34% is also higher than 25% for Eli Lilly.
  • Our Merck Operating Income Comparison and Eli Lilly Operating Income Comparison dashboards have more details.
  • Looking at financial risk, both are comparable. Although Merck’s 13% debt as a percentage of equity is higher than 6% for Eli Lilly, its 7% cash as a percentage of assets is higher than 4% for the latter, implying that Eli Lilly has a better debt position, but Merck has more cash cushion.

3. The Net of It All

  • We see that Eli Lilly has demonstrated better revenue growth over recent years and has a better debt position. On the other hand, Merck has seen better revenue growth over the recent quarters, is more profitable, has more cash cushion, and is available at a comparatively lower valuation.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Merck is currently the better choice of the two.
  • It is known that Eli Lilly has strong potential from some of its new drugs and the ones in the pipeline. However, it has already rallied quite a bit over recent years. LLY stock now trades at 10x its trailing revenues vs. its last five-year average of 8x. MRK stock is trading at 4.7x, trailing revenues vs. its last five-year average of 5.2x. Our Merck (MRK) Valuation Ratios Comparison and Eli Lilly (LLY) Valuation Ratios Comparison have more details.

While MRK stock may outperform LLY, 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 that offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Xylem vs. Merck.

Despite higher inflation and the Fed raising interest rates, Merck stock has risen 43% 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 Feb 2023
MTD [1]
YTD [1]
Total [2]
MRK Return 2% -1% 87%
LLY Return -7% -12% 337%
S&P 500 Return -3% 3% 77%
Trefis Multi-Strategy Portfolio -4% 7% 237%

[1] Month-to-date and year-to-date as of 2/27/2023
[2] Cumulative total returns since the end of 2016

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