We believe that Merck stock (NYSE: MRK) and Coca-Cola stock (NYSE: KO) will offer little returns in the next three years. Although these companies are from different sectors, we compare them because they have a similar market capitalization of $260 billion to $280 billion. The decision to invest often comes down to finding the best stocks within the parameters of certain characteristics that suit an investment style. The size of profits can matter, as larger profits can imply greater market power. Since these stocks are from different sectors, comparing P/S against one another may not be helpful. We compare their current multiples with the historical ones in the sections below to better gauge their valuations.
Interestingly, Merck has had a Sharpe Ratio of 0.5 since early 2017, while the figure stood at 0.3 for Coca-Cola, lower than 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.
Looking at stock returns, MRK stock has seen a 1% fall this year, compared to a 5% fall for KO stock, and both have underperformed vis-a-vis broader indices, with the S&P500 rising 17%. There is more to the comparison, and in the sections below, we discuss the possible returns for Merck and Coca-Cola in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in this analysis.
1. Merck’s Revenue Growth Is Better
- Merck’s revenue growth has been better, with a 15.1% average annual growth rate in the last three years, compared to 5.6% for Coca-Cola.
- For Coca-Cola, both at-home and away-from-home channels have grown, primarily driven by solid pricing trends.
- North America and Latin America segments saw strong 19% y-o-y sales growth in 2022, led by both volume growth and better price realization.
- Merck, over the recent years, has benefited from the label expansion of Keytruda and strong demand for its HPV vaccine – 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.
- Our Merck Revenue Comparison and Coca-Cola Revenue Comparison dashboards provide more insight into the companies’ sales.
- Looking forward, both companies are expected to see similar revenue growth in 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 about 2% for both – Merck and Coca-Cola, based on Trefis Machine Learning analysis.
- Pricing will likely stabilize for Coca-Cola in the near term while Merck faces increased competition for its diabetes drugs – Januvia and Janumet.
- Note that we have different methodologies for companies that are negatively impacted by Covid and those that are 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. Coca-Cola Is More Profitable
- Coca-Cola’s reported operating margin slid from 29.9% in 2019 to 28.8% in 2022, partly due to a rise in raw material and packaging costs, while Merck’s operating margin rose from 18.7% to 30.3% over this period.
- Looking at the last twelve-month period, Coca-Cola’s operating margin of 28.9% fares much better than 10.3% for Merck. The decline for Merck can be attributed to a $10 billion charge recorded in Q2’23 for the Prometheus acquisition.
- Our Merck Operating Income Comparison and Coca-Cola Operating Income Comparison dashboards have more details.
- Looking at financial risk, both are comparable. Merck’s 13% debt as a percentage of equity is slightly lower than 16% for Coca-Cola, and its 7% cash as a percentage of assets is lower than 14% for the latter, implying that Merck has a better debt position, but Coca-Cola has more cash cushion.
3. The Net of It All
- We see that Merck has demonstrated better revenue growth and has a better debt position. On the other hand, Coca-Cola is more profitable and has more cash cushion.
- Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe both companies will offer similar returns of 5%-7% in the next three years.
- The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 5% for Merck over this period vs. a 7% expected return for Coca-Cola, based on Trefis Machine Learning analysis – Merck vs. Coca-Cola – which also provides more details on how we arrive at these numbers.
- If we compare the current valuation multiple to the historical average, Coca-Cola fares slightly better. Merck stock trades at 4.7x revenues, compared to its last five-year average of 5.2x, while Coca-Cola stock trades at 5.9x trailing revenues vs. the last five-year average of 6.8x.
- Our Merck (MRK) Valuation Ratios Comparison and Coca-Cola (KO) Valuation Ratios Comparison have more details.
- There are better opportunities over these two stocks. Our Better Bets Than KO Stock and Better Bets Than MRK Stock dashboards detail S&P500 stocks that can offer better returns in the next three years.
While MRK stock may offer little returns in the next three years, 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.
|S&P 500 Return||-2%||17%||101%|
|Trefis Reinforced Value Portfolio||-4%||31%||573%|
 Month-to-date and year-to-date as of 8/30/2023
 Cumulative total returns since the end of 2016