Is MRK Stock Undervalued At $100?

Merck (NYSE: MRK) recently reported its Q3 results, with revenues and earnings exceeding the street estimates. It garnered $16.7 billion in revenue and adjusted earnings of $1.57 per share, compared to the consensus estimates of $16.5 billion and $1.50, respectively. The growth was primarily driven by higher sales of Keytruda. However, the company lowered its full-year earnings outlook to reflect a one-time charge of $0.24 per share related to deals with Curon Biopharmaceutical and Daiichi Sankyo. In this note, we discuss key takeaways from its recent results and valuation. Also see – What’s next for BMY stock?

How Did Merck Fare In Q3?

Merck’s revenue of $16.7 billion in Q3 was up 4% y-o-y, driven by continued market share gains for Keytruda, which saw a 17% y-o-y jump in sales to $7.4 billion. Merck’s new drugs – Winrevair and Capvaxive – have been gaining momentum. On the flip side, Gardasil sales grew fell 11% to $2.3 billion, due to continued decline in China. Januvia and Janumet also saw a sharp 42% y-o-y decline amid increased competition.

The company saw its adjusted gross margin expand by 350 bps to 80.5% due to favorable product mix. Merck’s bottom line stood at $1.57, and it includes a one-time charge of $0.79 per share for business developments related to the acquisition of EyeBio and CN201 from Curon. It also includes the expansion of the agreement with Daiichi Sankyo.

Looking forward, the company narrowed its sales outlook to $63.6 billion to $64.1 billion and adjusted earnings to be in the range of $7.72 and $7.77. We forecast the sales to be around $63.9 billion and the bottom line to be $7.75 for the full-year 2024.

What Does This Mean For MRK Stock?

We estimate Merck’s Valuation to be $130 per share, reflecting a 25% upside from its current market price of $102. At its current levels, MRK stock is currently trading at 4.3x trailing revenues, compared to the 4.5x average P/S ratio seen over the last five years. We think a higher valuation multiple for Merck would seem justified, given the massive growth in Keytruda and robust expected earnings growth in the coming years. The company’s recent acquisitions, including Prometheus, Acceleron, Imago, Harpoon Therapeutics, and EyeBio, will further bolster its top and bottom-line growth in the coming years.

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MRK stock, down 4% this year, has underperformed the broader markets, with the S&P 500 index rising 20%. However, if we look at a slightly longer period, MRK is one of a handful of stocks that have increased their value in each of the last three years. But, that still wasn’t enough for it to consistently beat the market. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is less volatile. And it 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.

While MRK stock looks like it has ample room for growth, it is helpful to see how Merck’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

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