After A 30% Fall In A Year Is Pfizer Stock A Better Pick Over Merck?

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Given its attractive valuation, we believe Pfizer stock (NYSE: PFE) is a better pick than its peer — Merck stock (NYSE: MRK). MRK trades at a higher valuation multiple of 5.6x revenues vs. 2.7x for PFE, due to its superior revenue growth over the last year and a better financial position. However, we think that this gap in valuation multiple will narrow in favor of Pfizer. There is more to the comparison, and in the sections below, we discuss why we believe PFE will offer better returns than MRK in the next three years. We compare a slew of factors, such as historical revenue growth, stock returns, and valuation, in an interactive dashboard analysis of Pfizer vs. MerckWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

PFE stock has seen a decline of 15% from levels of $35 in early January 2021 to around $30 now, while MRK stock has seen extremely strong gains of 65% from levels of $80 in early January 2021 to around $130 now. This compares with an increase of about 40% for the S&P 500 over this roughly three-year period.

However, the changes in PFE and MRK have been far from consistent. Returns for PFE were 60% in 2021, -13% in 2022, and -44% in 2023, while returns for MRK were -6% in 2021, 45% in 2022, and -2% in 2023. In comparison, the S&P 500 saw 27% gains in 2021, it then fell by 19% in 2022, but rose 24% in 2023. This indicates that PFE underperformed the S&P in 2023, while MRK underperformed the S&P in 2021 and 2023.

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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. 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 PFE and MRK face a similar situation as they did in 2023 and underperform the S&P over the next 12 months — or will they see a strong jump? While we expect both stocks to trend higher, PFE will likely outperform in the next three years.

1. Merck’s LTM Revenue Growth Is Better

  • Merck’s revenue growth over the last twelve months has been better, with a 1.4% gain versus -41.7% for Pfizer.
  • This can primarily be attributed to a sharp decline in Pfizer’s sales for its Covid-19 products.
  • However, if we look at the last three years, Pfizer fares better with a 25.2% average revenue growth rate, compared to 8.2% for Merck.
  • Pfizer’s sales over 2021 and 2022 surged due to a very high demand for its Covid-19 vaccine and treatment.
  • Lately, the company is facing increased competition for its blockbuster vaccine – Prevnar – which saw its sales growth slow to 1.6% last year versus 20.2% growth in 2022.
  • Merck, over the recent years, has benefited from the label expansion of Keytruda and strong demand for its HPV vaccine – Gardasil.
  • Keytruda alone garnered $25 billion in sales in 2023, growing at a solid 19% y-o-y. Gardasil accounted for $9 billion in sales last year, growing 29% y-o-y.
  • Our Pfizer Revenue Comparison and Merck Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, we believe Merck will continue to see stronger sales growth, driven by continued growth in Keytruda’s sales in the coming years. Despite a significant fall in sales for Pfizer’s Covid-19 products, it will likely see revenue rise in the coming years, albeit at a slower pace of low single-digit average growth rate. This can be attributed to the contribution of Seagen, which it acquired in December 2023.

2. Pfizer Is More Profitable

  • Pfizer’s reported operating margin plunged from 21.2% in 2020 to 5.7% in 2023, while Merck’s operating margin fell from 13.4% to 4.9% over this period.
  • Looking at the last twelve-month period, Pfizer’s operating margin of 5.7% fares slightly better than 4.9% for Merck.
  • The operating margin decline for Merck can be attributed to a $10 billion charge recorded in Q2’23 for the Prometheus acquisition. Pfizer also incurred restructuring costs and acquisition related charges associated with Seagen.
  • Looking at financial risk, Merck fares better, with its 10% debt as a percentage of equity much lower than 45% for Pfizer, and its 7% cash as a percentage of assets higher than 6% for the latter. This implies that Merck has a better debt and cash position.
  • The Seagen acquisition has led to a significant 2x rise in Pfizer’s debt levels to $71 billion, compared to $35 billion in 2022.

3. The Net of It All

  • We see that Merck has demonstrated better revenue growth over the last year, and it has a better debt and cash position. On the other hand, Pfizer is slightly more profitable and is trading at a comparatively lower valuation multiple.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Pfizer will offer better returns in the next three years.
  • The table below summarizes our revenue and return expectations for both companies over the next three years. It points to an expected return of 19% for Pfizer over this period vs. a 2% expected return for Merck, based on Trefis Machine Learning analysis — Pfizer vs. Merck — which also provides more details on how we arrive at these numbers.
  • Even if we compare the current valuation multiple to the historical average, Pfizer fares slightly better. It trades at 2.6x revenues, compared to its last five-year average of 3.8x, while Merck stock trades at 5.6x trailing revenues vs. the last five-year average of 5.2x.
  • Our Pfizer (PFE) Valuation Ratios Comparison and Merck (MRK) Valuation Ratios Comparison have more details.
  • Overall, we think that the recent fall in valuation multiple for Pfizer makes it a more attractive pick over Merck. The Seagen acquisition will help Pfizer expand its sales and pipeline. The total sales contribution from Seagen is expected to top $10 billion by 2030. It should also be noted that Merck will lose the market exclusivity (U.S.) for Keytruda and Gardasil in 2028.

While PFE may outperform MRK, it is helpful to see how Pfizer’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Returns Apr 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 PFE Return 0% -4% -15%
 MRK Return 0% 21% 124%
 S&P 500 Return 0% 10% 135%
 Trefis Reinforced Value Portfolio 0% 6% 653%

[1] Returns as of 4/1/2024
[2] Cumulative total returns since the end of 2016

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