Is An Earnings Beat In The Cards For Merck Stock?

Merck (NYSE: MRK) will report its Q2 2024 results on Tuesday, July 30. We expect the company to post revenue of $15.9 billion and adjusted earnings of $2.20, slightly ahead of the street estimates. As usual, Keytruda will be driving the growth for Merck with quarterly sales estimated to be over $7 billion, reflecting y-o-y growth in the high teens. Merck’s HPV vaccine – Gardasil – is expected to see its sales rise in the mid-teens. Although we expect Merck may post an upbeat Q2, we think its stock has little room for growth. Our interactive dashboard analysis of Merck’s Earnings Preview has more details the company’s revenues and earnings for the quarter. So, what are some of the trends that are likely to drive Merck’s results?

Firstly, let us look at Merck’s stock performance in recent years. MRK stock has seen strong gains of 55% from levels of $80 in early January 2021 to around $125 now, vs. an increase of about 45% for the S&P 500 over this 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 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, Merck looks appropriately priced. We estimate Merck’s Valuation to be $135 per share, close to its current market price of $127. At its current levels, MRK is trading at 5x revenues, compared to the 4.5x average over the last five years.

Looking at the previous quarter, Merck’s revenue of $15.8 billion in Q2 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.

Coming to the latest quarter, Keytruda and Gardasil remain the key growth drivers. Keytruda’s expansion into new indications will help it gain market share. Gardasil is seeing strong demand in China, a trend expected to continue in the near term. However, the company will continue to face generic competition for its diabetes drugs – Januvia/Janumet – in Europe. It will be interesting to see how the operating margin trends for Merck in Q2, given that the company’s management stated a likely expansion for this metric in 2024 and a robust expansion seen in Q1’24.