Is Merck Stock Fully Valued At $130?

Merck (NYSE: MRK) recently reported its Q1 results, with revenues and earnings exceeding our estimates. The company garnered $15.8 billion in revenue and adjusted earnings of $2.07 per share, compared to our estimates of $15.2 billion and $1.97, respectively. The growth was primarily driven by higher sales of Keytruda and Gardasil. Although Merck posted an upbeat Q1, we think its stock is fully valued at levels of around $130. In this note, we discuss Merck’s stock performance, key takeaways from its recent results, and valuation.

Firstly, let us look at Merck’s stock performance in recent years. MRK stock has seen strong gains of 65% from levels of $80 in early January 2021 to around $130 now, vs. an increase of about 35% for the S&P 500 over this roughly three-year period. However, the increase in MRK stock has been far from consistent. Returns for the stock were -6% in 2021, 45% in 2022, and -2% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that MRK underperformed the S&P in 2021 and 2023.

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 MRK face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months — or will it see a strong jump? From a valuation perspective, MRK stock looks like it is appropriately priced. We estimate Merck’s Valuation to be $135 per share, close to its current market price of $130. At its current levels, MRK stock is trading at 15x forward expected earnings of $8.59 on a per share and adjusted basis. The 15x figure is slightly higher than the 13x average seen over the past few years, excluding 2023. This is because the 2023 EPS of $1.51 was much lower due to a $17.1 billion R&D charge related to the Prometheus and Imago acquisitions and upfront payments for collaboration agreements with Kelun-Biotech and Daiichi Sankyo.

Merck’s revenue of $15.8 billion in Q1 was up 9% y-o-y, driven by continued market share gains for Keytruda, which saw a 20% y-o-y jump in sales to $6.9 billion. Gardasil sales were up 14% to $2.2 billion, while Januvia/Janumet sales fell 24% due to increased competition. The company saw its adjusted gross margin expand by 430 bps to 81.2% due to favorable product mix. Higher revenues and margin expansion resulted in a 48% y-o-y jump in the bottom line to $2.07 on an adjusted basis.

Looking forward, Merck should continue to benefit from the label expansion of Keytruda and strong demand for its HPV vaccine – Gardasil. The company’s recent acquisitions, including Prometheus, Acceleron, and Imago, will further bolster its top and bottom-line growth in the coming years. Merck raised its outlook with sales expected to be in the range of $63.1 billion and $64.3 billion, and earnings to be in the range of $8.53 and $8.65. Overall, Merck posted a solid Q1, but we think much of the positives appear to be already priced in, with its stock trading at a valuation multiple higher than its historical average.

While MRK stock looks like it is fully valued, 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.

[1] Returns as of 4/30/2024
[2] Cumulative total returns since the end of 2016

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