I am neutral on Merck (MRK), because its valuation multiples indicate that it trades in line with fair value based on its past history.
Merck is an American multinational, research-driven pharmaceutical company that discovers, develops, and markets medicine, vaccines, biologic therapies, and veterinary health products to combat the world’s biggest health threats. (See Insiders’ Hot Stocks on TipRanks)
Strengths
Merck has the distinction of producing multiple blockbuster drugs and pharmaceutical products, including vaccines against chickenpox and HPV, anti-diabetic medication, and cancer immunotherapy.
The company stands at 65th on the 2021 Fortune 500 list based on 2020 revenues. Merck is one of the strongest brand names in the pharmaceutical sector, and is well known for providing medical help to the underserved population in the United States.
It has a global workforce of more than 40,000 employees on six continents, and has excellent R&D and innovation capabilities.
Recent Results
Merck’s pharmaceutical segmented reported revenue of $10 billion, showing an increase of 22% from the same quarter of 2020. Excluding the impact of foreign exchange, the company saw a growth in sales by 18% due to an increase in demand and pandemic recovery, which resulted in $900 million gains in Pharmaceutical revenues.
Keytruda, the biggest prescription medication in Merck’s portfolio, generated sales of $4.2 billion in Q2 2021. The sales have benefited from continued momentum in lung cancer indications and uptake in new indications.
Sales of Gardasil, or the HPV vaccine, rose 88% year-over-year to $1.2 billion. The increase was due to sales rebound from the pandemic, strong demand in the United States, and continued uptake in international markets, including China.
The Animal Health segment also saw a sales gain of 34% to $1.5 billion. Excluding the impact on currency from foreign exchange, sales grew 27% due to higher demand for pet animal products and animal vaccines and an increased call for swine, ruminant, and poultry products for livestock.
Merck also announced guidance for the full year of 2021 and expects revenue to be in the range of $46.4 billion to $47.4 billion, as compared to the previous guidance of $45.8 billion to $47.8 billion. The guidance shows an average growth of 13% and includes a positive foreign exchange impact of less than 2%.
Merck’s Q2 2021 results are mixed as it missed analysts’ estimates for earnings, but exceeded estimates for sales. The market’s recovery from the pandemic, as well as a strong global demand for Merck’s products, has led to improve sales; however, the company expects a few negative impacts from the pandemic to affect its business.
Valuation Metrics
Merck’s stock looks fairly valued right now as its EV/EBITDA ratio and price-to-normalized earnings ratio both indicate the stock is trading near or even below its historical average.
The EV/EBITDA ratio is currently 10.8x, compared to its five-year average of 11.2x, and the price-to-normalized earnings ratio is currently 13x, compared to its five-year average of 15x.
Wall Street’s Take
From Wall Street analysts, Merck earns a Moderate Buy analyst consensus based on five Buy ratings, four Hold ratings, and zero Sell ratings in the past three months.
The average Merck price target of $92.78 puts the upside potential at 15.1%.
Summary and Conclusions
Merck is a leading global pharmaceutical company whose stock price looks to be roughly fairly valued at present.
Given the strength of its business model, the stock looks like it could be a solid component in a dividend portfolio.
Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.
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