Merck Stock: Join the Rally at a 2.1% Discount

Merck (MRK) stock might be a good buy now. Why? Because you get high margins – reflective of pricing power and cash generation capacity – for a discounted price. Companies like this generate consistent, predictable profits and cash flows, which reduce risk and allow capital to be reinvested. The market tends to reward that.

What Is Happening With MRK

MRK is up 5.4% so far this year, but is actually 2.1% cheaper based on its P/S (Price-to-Sales) ratio compared to 1 year ago.

Here is what’s going well for the company. Merck’s stock is up over 3% year-to-date. The company demonstrates strong pricing power, driven by sustained customer adoption of its oncology lead, KEYTRUDA. Its third-quarter performance included the September FDA approval of a new subcutaneous KEYTRUDA formulation, extending its market reach. New product launches, such as WINREVAIR and CAPVAXIVE, are generating significant initial demand, particularly WINREVAIR with substantial increases in orders. Despite declining GARDASIL uptake in certain Asian markets, the Animal Health segment delivers consistent growth, bolstered by recent acquisitions like Verona Pharma, contributing to robust cash flow capacity and margin strength.

MRK Has Strong Fundamentals

• Recent Profitability: Nearly 26.6% operating cash flow margin and 34.9% operating margin LTM.
• Long-Term Profitability: About 28.2% operating cash flow margin and 23.7% operating margin last 3-year average.
• Revenue Growth: Merck saw growth of 1.7% LTM and 2.9% last 3-year average, but this is not a growth story
• Available At Discount: At P/S multiple of 3.9, MRK stock is available at a 2.1% discount vs 1 year ago.

Below is a quick comparison of MRK fundamentals with S&P medians.

*LTM: Last Twelve Months

Don’t Expect A Slam Dunk, Though

While MRK stock may be a compelling investment opportunity, it’s always helpful to be aware of a stock’s history of drawdown. Merck fell about 38% in the Dot-Com Bubble and took an even bigger hit, 63%, during the Global Financial Crisis. The 2018 correction shaved off 18%, while the Covid sell-off pulled it down roughly 27%. The recent inflation shock knocked around 20% off the peak. So even a solid name like MRK isn’t immune when the market turns sour. Good fundamentals matter, but at times of widespread stress, declines like these are expected.

If you want more details, read Buy or Sell MRK Stock.

How We Arrived At MRK Stock

MRK piqued our interest because it meets the following criteria:

1. Greater than $10 Bil in market cap
2. High CFO (cash flow from operations) margins or operating margins
3. Meaningfully declined in valuation over the past 1 year

But if MRK doesn’t look good enough to you, here are other stocks that also check all these boxes:

1. Eli Lilly (LLY)
2. Visa (V)
3. Salesforce (CRM)

Notably, a portfolio that was built starting 12/31/2016 with stocks that fulfil the criteria above would have performed as follows:

• Average 12-month forward returns of nearly 19%
• 12-month win rate (percentage of picks returning positive) of about 72%

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