We believe that Merck stock (NYSE: MRK) is currently a better pick than its peer, Pfizer stock (NYSE: PFE), despite its higher valuation of 3.8x trailing revenues vs. 2.5x for Pfizer. This valuation gap can be attributed to Merck’s superior profitability and lower financial risk, as discussed below.
If we look at stock returns, Merck’s 13% growth this year is much better than a 23% fall for Pfizer stock and -18% returns for the broader S&P 500 index. There is more to the comparison, and in the sections below, we discuss why we believe MRK stock will offer better returns than PFE stock in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis of Pfizer vs. Merck: Which Stock Is A Better Bet? Parts of the analysis are summarized below.
1. Pfizer Revenue Growth Is Better
- Both companies posted strong double-digit sales growth over the last twelve months. Still, Pfizer’s revenue growth of 82.6% is higher than 30.2% for Merck.
- However, if we look at a longer time frame, Pfizer saw its revenue grow at an average annual rate of 32.2% to $81.3 billion in 2021, compared to $40.8 billion in 2018, while Merck saw its sales grow at an average growth rate of 5.3% to $48.7 billion in 2021 vs. $42.3 billion in 2018.
- Pfizer’s sales over the recent years were primarily driven by a very high demand for the Covid-19 vaccine. However, the demand for Covid-19 vaccines is also declining with a rise in the global vaccination rate. This will likely weigh on Pfizer’s revenue growth over the coming years. The revenue growth in 2022, though, will be bolstered by its Covid-19 antiviral pill sales.
- Merck, over the recent years, has benefited from the label expansion of Keytruda and strong demand for vaccines, primarily Gardasil. Both of these products are seeing strong demand, with Q2 2022 sales rising 26% y-o-y to $5.3 billion for Keytruda and a 36% uptick to $1.7 billion for Gardasil. Both of these are expected to continue driving revenue growth for Merck.
- Our Pfizer Revenue and Merck Revenue dashboards provide more insight into the companies’ sales.
- Looking forward, revenue for both companies is expected to grow at a similar pace over 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 1.6% for both Pfizer and Merck, based on Trefis Machine Learning analysis.
- Note that we have different methodologies for companies negatively impacted by Covid and those 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. Merck Is More Profitable And Offers Lower Risk
- Pfizer’s operating margin of 30.4% over the last twelve-month period is slightly lower than 33.0% for Merck.
- This compares with 36.2% and 18.7% figures seen in 2019, before the pandemic, respectively.
- Merck’s free cash flow margin of 33.2% is slightly better than 31.1% for Pfizer.
- Our Pfizer Operating Income and Merck Operating Income dashboards have more details.
- Looking at financial risk, Merck is placed better. Its 14.5% debt as a percentage of equity is slightly lower than 15.8% for Pfizer, while its 9.7% cash as a percentage of assets is higher than 0.9% for the latter, implying that Merck has a better debt position and more cash cushion.
3. The Net of It All
- We see that Pfizer has demonstrated better revenue growth and is available at a comparatively lower valuation. On the other hand, Merck is more profitable, has a better debt position, and has more cash cushion, implying lower financial risk.
- Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we still believe Merck is currently the better choice of the two.
- The table below summarizes our revenue and return expectations for Pfizer and Merck over the next three years and points to an expected return of 14% for Merck over this period vs. a 3% expected return for Pfizer stock, implying that investors are better off buying MRK over PFE, based on Trefis Machine Learning analysis – Pfizer vs. Merck– which also provides more details on how we arrive at these numbers.
Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Xylem vs. Merck.
Despite inflation rising and the Fed raising interest rates, Merck stock has risen 13% 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.
|S&P 500 Return||-1%||-18%||75%|
|Trefis Multi-Strategy Portfolio||-3%||-18%||225%|
 Month-to-date and year-to-date as of 9/7/2022
 Cumulative total returns since the end of 2016