Should You Buy Merck Stock After An Upbeat Q2?

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MRK: Merck logo
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Merck

Merck stock (NYSE: MRK), after an 8% fall in a month, underperforming the broader markets, with the S&P500 up 3%, appears to have room for growth. The company posted upbeat Q2 results this week, with solid growth for Keytruda and Gardasil. Merck’s revenues were up 3% to $15.0 billion in Q2’23, compared to the consensus estimate of $14.4 billion. This growth was driven by a 19% rise in Keytruda sales and a stellar 47% rise in Gardasil sales. This can be attributed to continued market share gains for Keytruda and label expansion. Merck’s Covid-19 antiviral treatment – Lagevrio – saw an 83% y-o-y fall in sales. Excluding Lagevrio, the top line expanded by 11%.

The company’s gross margin improved by nearly 200 bps to 73.2% due to a better product mix and lower sales of the low-margin drug – Lagevrio. Merck has seen its operating margin rise from 18.7% in 2019 to 30.3% in 2022. Our Merck Operating Income Comparison dashboard has more details. Merck reported a loss of $2.06 on a per share and adjusted basis in Q2, compared to a profit of $1.87 per share in the prior-year quarter. However, this is due to the company’s one-time charge of $10.2 billion toward the Prometheus acquisition, which will help Merck strengthen its immunology drugs portfolio.

Not only did Merck post upbeat Q2 results, but it also raised its full-year outlook. It now expects its sales to range between $58.6 billion and $59.6 billion and its adjusted EPS to be between $2.95 and $3.05. This can be attributed to strong sales growth for some of its drugs and a healthy margin expansion in recent quarters. We have updated our model to reflect the latest quarterly performance, and we believe that it will likely see sales and earnings toward the higher end of its provided range.

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Looking at the stock price, we estimate Merck’s Valuation to be $124 per share, about 18% above the current market price of $105. This represents a 41x P/E multiple based on our earnings forecast of $3.05 on a per-share and adjusted basis for 2023. While this figure optically looks high, it is due to a $4.02 per share charge related to the Prometheus acquisition. If we look at the 2024 earnings, the P/E multiple is only 14x, marginally ahead of its last five-year average of 13x.

Overall, investors will likely be better off buying the dip in Merck stock for solid gains in the long run. Not only will Merck continue to expand its top and bottom line with Keytruda and Gardasil, among other drugs, the recent acquisitions will help it combat the competition from biosimilars and generics for the drugs that have or are about to lose market exclusivity.

While MRK stock can see higher levels, 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.

Given higher inflation and the Fed raising interest rates, among other factors, Merck stock has seen a 5% fall this year. Can it drop more? 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 portfolio that aims for long-term growth? Here’s a value portfolio that’s done much better than the market since 2016.

Returns Aug 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 MRK Return -1% -5% 79%
 S&P 500 Return 0% 19% 104%
 Trefis Multi-Strategy Portfolio 0% 28% 312%

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

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