At $100 Does Merck Stock Have Room For Growth?

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Upside
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Market
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MRK: Merck logo
MRK
Merck

Merck (NYSE: MRK) reported its Q3 results last month, with revenues and earnings beating the street estimates, and we believe that MRK stock has ample room for growth, as discussed below. The company reported revenue of $16.0 billion and adjusted profit of $2.13 per share compared to the consensus estimates of $15.3 billion in sales and $1.96 earnings per share. In this note, we discuss Merck’s stock performance, key takeaways from its recent results, and valuation.

MRK stock has shown strong gains of 25% from levels of $80 in early January 2021 to around $100 now, vs. an increase of about 15% for the S&P 500 over this roughly 3-year period. However, the increase in MRK stock has been far from consistent. Returns for the stock were -6% in 2021, 45% in 2022, and -8% in 2023 (YTD).

In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 13% in 2023 (YTD) – indicating that MRK underperformed the S&P in 2021 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Health Care sector, including LLY, UNH, and JNJ, and even for the megacap stars GOOG, TSLA, and MSFT.

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In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could MRK face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump? From a valuation perspective, MRK stock looks like it has room for growth. We estimate Merck’s Valuation to be $122 per share, reflecting about 20% upside from its current price of around $100. Our forecast is based on a 14x P/E multiple for MRK and expected earnings of $8.53 on a per-share and adjusted basis for the full year 2024. We are using the 2024 earnings figure given that the 2023 adjusted EPS is expected to be much lower at $1.37 due to a $17.1 billion R&D charge related to the Prometheus and Imago acquisitions and upfront payments for collaboration agreements with Kelun-Biotech and Daiichi Sankyo. The company lowered its 2023 earnings outlook to be in the range of $1.33 and $1.38 (vs. the $2.95 and $3.05 range earlier), reflecting its recent pretax charge of $5.5 billion for the collaboration agreement with Daiichi Sankyo.

Merck’s revenue of $16.0 billion in Q3 was up 7% y-o-y, primarily due to higher sales of Keytruda, Gardasil, and its Covid-19 antiviral – Lagevrio. Excluding Lagevrio, sales were up 6%, driven by continued market share gains for Keytruda, which saw a 17% y-o-y jump in sales to $6.3 billion. For the full year 2023, the company raised its total revenue outlook to $59.7 billion and $60.2 billion versus the $58.6 billion to $59.6 billion guidance provided in August. Merck’s adjusted profit of $5.4 billion in Q3 2023 reflected a 15% growth from its $4.7 billion profit figure in the prior-year quarter. The adjusted profit of $2.13 per share was higher than the $1.85 figure in the prior year quarter.

Looking forward, Merck should continue to benefit from the label expansion of Keytruda and strong demand for its HPV vaccine – Gardasil. The company’s recent acquisitions, including Prometheus, Acceleron, and Imago, will further bolster its top and bottom-line growth in the coming years. At its current price of around $100, MRK stock trades at 12x forward earnings compared to its last five-year average of 13x, and it will likely see higher levels, in our view.

While MRK stock looks like it has some room for growth, 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.

Returns Nov 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 MRK Return 0% -8% 74%
 S&P 500 Return 4% 13% 94%
 Trefis Reinforced Value Portfolio 2% 20% 518%

[1] Month-to-date and year-to-date as of 11/10/2023
[2] Cumulative total returns since the end of 2016

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