Merck (MRK) is a healthcare giant that develops and produces innovative health solutions through its prescription medicines, animal health products, biologic therapies, and vaccines internationally.
The company’s primary activities are largely contained on a products-basis, and contain two operating segments: Pharmaceuticals and Animal Health.
Last year, Merck spun off its women’s health and biosimilars businesses into a new, autonomous, publicly traded company, Organon & Co. (OGN), with Merck shareholders issued shares in the new company.
Another recent major development for Merck was the successful launch of molnupiravir. The investigational oral antiviral medicine for the treatment of mild to moderate COVID-19 was granted Emergency Use Authorization by the FDA back in December, with its first revenues of $952 million already appearing in Fiscal 2021’s results.
With strong profitability growth prospects and molnupiravir’s patent potentially lasting till 2038, Merck continues to offer attractive dividend growth prospects moving forward, in my view. I am neutral on the stock.
Recent Performance
Merck’s latest results came in quite strong, with revenues from continuing operations growing 24% to $13.5 billion versus the comparable period last year.
Adjusted net income, which excludes acquisition and divestiture-related costs, restructuring costs, and income/losses from Merck’s equity investments, was $4.57 billion, or $1.80 per share.
This is a substantial improvement compared to $2.49 billion, or $0.98 per share last year. The increase in profits reflects the favorable impacts of molnupiravir (potentially very high margin here) and effective tax rates.
Specifically, Pharmaceutical revenues increased 24% to $12 billion, with Keytruda continuing to perform vigorously, posting sales growth of 15% to $4.57 billion.
Keytruda revenues should continue to advance going forward as Merck keeps on capturing a larger chunk of the underlying market share over time.
Concerning Merck’s HPV vaccine, Gardasil, its revenues grew 50% year-over-year to $1.52 billion, primarily pushed by strong international demand, especially in China, which also benefited from the elevated supply.
The growth rate is quite impressive, considering that Gardasil’s performance was offset by softer sales in the U.S. as a result of the timing of public sector purchases.
Note that last year’s (Q4 2020) Gardasil sales included replenishing doses borrowed from the CDC, which had boosted sales by $120 million at the time. Thus, this year’s year-over-year would be even higher on an “adjusted” basis.
Merck’s Animal Health division also performed decently, recording an 8% increase in revenues, which reached $1.26 billion, driven by higher sales in companion animal products that were largely supported by the BRAVECTO (fluralaner) parasiticide line of products, as well as vaccines.
Management estimates Fiscal 2022 full revenues to land between $56.1 billion and $57.6 billion, suggesting year-over-year growth between 18% and 21%. It also forecast adjusted EPS to be in a range of $7.12 to $7.27 for the year, which also implies a 19.5% year-over-year increase from Fiscal 2021’s adjusted EPS of $6.02.
According to Q4’s conference call, management expects that molnupiravir will be a great contributor to this year’s earnings, with several purchase agreements already pointing toward approximately 10 million courses of therapy, which should translate to $5 billion to $6 billion in additional revenues this year.
Dividend & Valuation
Merck halted its dividend hikes from 2005 to 2012, as its operating cash flows had struggled to grow during this period. However, Merck has increased its dividend every year consecutively since then.
The company now counts 12 years of consecutive annual dividend hikes, featuring a 10-year CAGR of 5.78%. The latest increase hike was by 6.2%, which could imply a modest acceleration in dividend growth ahead.
At the midpoint of management’s guidance and Merck’s current DPS run rate, the payout ratio stands at a rather comfortable 38.3%.
Following Merck stock’s rally over the past few months, its valuation has undergone a substantial expansion. Merck is trading at around 12 times its forward non-GAAP net income at its current price levels.
This is a notable boost from the stock’s forward P/E of between 6x and 8x over the past couple of years but still very close to Merck’s historical average.
In my view, shares are rather fairly valued at their current levels, reflecting both Merck’s portfolio strength, and the underlying risks related to some of its patents expiring in the next few years.
Wall Street’s Take
Turning to Wall Street, Merck & Company has a Moderate Buy consensus rating based on eight Buys and three Holds assigned in the past three months.
At $93.18, Merck & Company’s stock price prediction suggests 9.5% upside potential.
Takeaway
Merck’s performance last year was excellent, while the company’s outlook for this year appears very promising, with molnupiravir likely to be a significant contributor to future sales.
At their current levels, Merck shares offer a decent investment case. The company’s dividend growth prospects should be exciting amid growing earnings and a healthy payout ratio.
Combined with the 3.1% yield, dividend growth investors are likely to be pleased with Merck’s performance. That said, the stock’s steep discount over the past couple of years has likely evaporated as well, as Merck should be more or less fairly valued here.
Download the TipRanks mobile app now
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Read full Disclaimer & Disclosure
