Healthcare stalwart Merck & Co., Inc. (MRK) continues to strive toward expanding its pipeline. The company recently announced an exclusive license and collaboration agreement with Kelun-Biotech, a clinical-stage biotech company, to develop seven investigational preclinical antibody-drug conjugates (ADC) for cancer treatment.
The agreement grants MRK global licenses to manufacture and commercialize multiple investigational preclinical ADC therapies and exclusive options to obtain additional licenses for ADC candidates.
The company also announced that it would acquire clinical-stage biopharmaceutical company Imago BioSciences, Inc. (IMGO) for an approximate total equity value of $1.35 billion. The transaction, expected to close in the first quarter of 2023, should broaden MRK’s hematology portfolio. On December 12, MRK started a cash tender offer to purchase all outstanding shares of the common stock of IMGO.
The stock has gained 46.4% over the past year to close its last trading session at $112.12. It has gained 30.6% over the past three months. It is trading higher than its 50-day moving average of $104.22 and 200-day moving average of $92.18, indicating an uptrend.
Here are the factors that could influence MRK’s performance in the near term:
Discounted Valuation
In terms of its forward P/E, MRK is trading at 19.19x, 23.5% lower than the industry average of 25.08x. The stock’s forward non-GAAP PEG multiple of 1.47 is 24.7% lower than the industry average of 1.96. In terms of its forward EV/EBIT, the stock is trading at 13.54x, 20.7% lower than the industry average of 17.07x.
Strong Financials
For the fiscal third quarter of 2022, MRK’s sales increased 14% year-over-year to $14.96 billion. Excluding certain items, its non-GAAP net income and non-GAAP EPS came in at $4.7 billion and $1.85, respectively, up 4% from their year-ago values.
MRK’s revenue grew at an 8.7% CAGR over the past three years and an 8.2% CAGR over the past five years. In the last three years, its EBIT and net income grew at CAGRs of 10.7% and 17.9%, respectively. Its EPS also increased at an 18.8% CAGR over the same period.
Favorable Analyst Estimates
The consensus EPS estimate for the current year (fiscal 2022) of $7.39 indicates a 22.8% year-over-year improvement. Likewise, the consensus revenue estimate of $59.07 billion for the same year reflects a rise of 21.3% from the prior year. Moreover, analysts expect MRK’s EPS to grow 11.9% per annum over the next five years.
Solid Profitability
MRK’s trailing-12-month EBITDA margin of 40.82% is 995.6% higher than the industry average of 3.73%. Its trailing-12-month net income margin of 25.88% compares to the industry average of negative 5.94%.
Its trailing-12-month ROCE, ROTC, and ROTA of 38.18%, 18.53%, and 14.25% compare to the respective industry averages of negative 39.73%, 21.95%, and 31.22%.
Reliable Dividend
The company has a record of paying steady dividends. On November 29, MRK declared a dividend of $0.73 per share of the company’s common stock for the first quarter of 2023. Its annual dividend of $2.92 yields 2.6% on the current share price. It has a four-year average yield of 2.95%.
The company’s dividend payouts have increased at a 9.1% CAGR over the past three years and a 9.2% CAGR over the past five years. The company grew its dividend payments for 12 consecutive years.
POWR Ratings Reflect Promising Prospects
MRK’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. MRK has a Value grade of B, in sync with its cheap valuation multiples. The stock also has a B grade for Sentiment and Quality, consistent with favorable analyst estimates and higher-than-industry profitability.
In the 159-stock Medical – Pharmaceuticals industry, it is ranked #10.
Click here to see the additional POWR Ratings for MRK (Growth, Momentum, and Stability).
View all the top stocks in the Medical – Pharmaceuticals industry here.
Bottom Line
MRK’s efforts to strengthen its product pipeline should boost its profitability. Moreover, the company has grown its topline and bottom line over the years steadily. The company also has a reliable dividend payment history. Hence, this stock might be a solid buy in 2023.
How Does Merck & Co., Inc. (MRK) Stack up Against Its Peers?
While MRK has an overall POWR Rating of A, one might consider looking at its industry peers, Novo Nordisk A/S (NVO) and Pfizer Inc. (PFE), which also have an overall A (Strong Buy) rating.
MRK shares were trading at $112.56 per share on Wednesday morning, up $0.44 (+0.39%). Year-to-date, MRK has gained 51.59%, versus a -18.23% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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