Should You Buy Merck Stock At $120?

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MRK
Merck

Merck stock (NYSE: MRK) is up 5% in a month, faring slightly better than the broader markets, with the S&P500 up 1%. Although the company posted upbeat Q1 results late last month, we believe MRK stock is fully valued. Merck’s revenues were down 9% to $14.5 billion in Q1’23, compared to our forecast of $13.9 billion. This decline in revenue can primarily be attributed to lower sales for its Covid-19 antiviral pill – Lagevrio. Excluding Lagevrio, the company’s top line expanded by 11%. This growth was driven by continued market share gains and strong performance for the world’s biggest drug (by revenue) – Keytruda – based on expected 2023 sales of about $23 billion, topping the likes of AbbVie’s Humira and Pfizer’s Covid-19 vaccine. While Keytruda sales were up 20% to $5.8 billion in Q1, Merck’s Gardasil continued to grow strongly, with its sales rising 35% y-o-y to $2.0 billion.

The company’s gross margins improved by 670 bps to 72.9% in Q1 due to a favorable impact of product mix, including lower sales of its low-margin drug – Lagevrio.  However, Merck’s operating margin plunged over 900 bps to 26% in Q1’23 due to a $1.2 billion charge for the acquisition of Imago. Our Merck Operating Income Comparison dashboard has more details. The earnings of $1.40 on a per share and adjusted basis were down 35% from $2.14 in the prior-year quarter, and this compares with our estimate of $1.36. The decline in earnings can be attributed to lower sales and charges related to the Imago acquisition.

Not only did Merck post upbeat Q1 results, but it also raised its full-year outlook. It now expects its sales to be in the range of $57.7 billion and $58.9 billion, compared to its previous guidance of $52.7 billion and $58.7 billion. Similarly, it now expects earnings of $6.88 to $7.00 on a per-share and adjusted basis, vs. its previous outlook of $6.80 and $6.95.

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Looking at valuation, we estimate Merck’s Valuation to be $112 per share, slightly below its current market price of $118. At its current levels, MRK is trading a forward P/E multiple of 17x based on our EPS forecast of $6.95 in 2023, slightly higher than the last three-year average of 14x, implying that MRK stock is fully priced. A slight rise in the P/E multiple is justified, given that the company should benefit from its recent acquisitions, resulting in better earnings growth in the coming years. While we don’t see any significant downside risk for MRK from the current levels, investors will likely be better off waiting for a dip to enter, in our view.

While MRK stock looks fully valued, 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 6% 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.

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 May 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 MRK Return 2% 6% 100%
 S&P 500 Return -1% 8% 85%
 Trefis Multi-Strategy Portfolio 0% 8% 240%

[1] Month-to-date and year-to-date as of 5/8/2023
[2] Cumulative total returns since the end of 2016

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