The current macroeconomic climate is highly uncertain. The likelihood of a recession is high as the Fed will likely keep raising interest rates, and lending standards are expected to be tightened. Minutes from the Fed’s March meeting show that the staff believes the economy could be in a mild recession by the end of the year.
Pharma stocks usually perform well during a recession as their demand remains stable irrespective of the economic cycle, helping them maintain their profit margins. To that end, Merck & Co., Inc. (MRK) could be an ideal stock to invest in now.
In this piece, I have discussed several reasons why it could be wise to buy the stock now.
MRK surpassed the consensus EPS and revenue estimates in the fourth quarter of fiscal 2022. Its revenue beat analyst estimates by 1.3%, while its EPS came 5.4% above the consensus estimate. MRK’s Chairman and CEO, Robert M. Davis, said, “2022 was an exceptional year for Merck, which is a testament to the profound impact our medicines and vaccines are having on patients globally.”
On April 16, 2023, MRK announced that it entered into a definitive agreement to acquire Prometheus Biosciences, Inc. (RXDX) for a total value of $10.80 billion. MRK CEO Robert Davis said, “The agreement with Prometheus will accelerate our growing presence in immunology where there remains substantial unmet patient need.”
“This transaction adds diversity to our overall portfolio and is an important building block as we strengthen the sustainable innovation engine that will drive our growth well into the next decade,” he added.
With Keytruda scheduled to lose its patent protection in 2028, MRK was actively looking for a late-stage asset. MRK’s interest was in RXDX’s late-phase bowel disease drug candidate PRA023, which is a treatment for ulcerative colitis and Crohn’s disease. According to analysts, the inflammatory bowel disease market is expected to increase to $49 billion by 2030.
For fiscal 2023, MRK expects worldwide sales to come between $57.20 billion and $58.70 billion. Its non-GAAP EPS is expected to come between $6.80 and $6.95.
MRK paid a dividend of $0.73 per share to shareholders on April 10, 2023. Its annual dividend of $2.92 yields 2.56% on the current share price. The company’s dividend payouts have increased at an 8.7% CAGR over the past three years and a 9.4% CAGR over the past five years. Its four-year average yield is 2.95%.
MRK’s stock has gained 23.6% in price over the past nine months and 33% over the past year to close the last trading session at $114.13. Citi upgraded MRK to Buy from Neutral.
Here’s what could influence MRK’s performance in the upcoming months:
Recent Key Developments
On January 11, 2023, MRK announced the completion of the cash tender offer for the outstanding shares of Imago BioSciences, Inc. (IMGO). MRK’s CEO and President Robert Davis said, “This acquisition of Imago augments our pipeline and strengthens our presence in the growing field of hematology.”
On April 3, 2023, MRK announced that the U.S. FDA approved Keytruda in combination with Padcev for the treatment of adult patients with locally advanced or metastatic urothelial carcinoma who are not eligible for cisplatin-containing chemotherapy.
Mixed Financials
For the fiscal year ended December 31, 2022, MRK’s sales increased 21.7% year-over-year to $59.28 billion. The company’s non-GAAP net income rose 39.5% over the prior-year period to $19 billion. Its non-GAAP EPS came in at $7.48, representing an increase of 39.3% year-over-year.
MRK’s sales for the fourth quarter ended December 31, 2022, increased 2% year-over-year to $13.83 billion. Its non-GAAP net income declined 10% year-over-year to $4.13 billion. In addition, its non-GAAP EPS declined 10% year-over-year to $1.62.
Solid Historical Growth
MRK’s EBIT grew at a CAGR of 24.6% over the past three years. Its revenue grew at a CAGR of 14.9% over the past three years. In addition, its net income grew at a CAGR of 13.8% in the same time frame.
Mixed Analyst Estimates
MRK’s EPS and revenue for fiscal 2023 are expected to decline 7.4% and 1.7% year-over-year to $6.92 and $58.30 billion, respectively. Its EPS and revenue for fiscal 2024 are expected to increase 23.1% and 6.3% year-over-year to $8.52 and $61.97 billion, respectively.
Discounted Valuation
In terms of forward EV/EBITDA, MRK’s 13.02x is 1.6% lower than the 13.23x industry average. Its 14.56x forward EV/EBIT is 11.3% lower than the 16.41x industry average. Likewise, its 1.65x forward non-GAAP PEG is 21.7% lower than the 2.11x industry average.
High Profitability
In terms of the trailing-12-month gross profit margin, MRK’s 70.98% is 27.1% higher than the 55.83% industry average. Likewise, its 41.08% trailing-12-month EBITDA margin is significantly higher than the industry average of 2.17%. Furthermore, the stock’s 0.55x trailing-12-month asset turnover ratio is 58.3% higher than the industry average of 0.35x.
POWR Ratings Show Promise
MRK has an overall rating of B, equating to a Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. MRK has a B grade for Value, consistent with its discounted valuation.
It has a B grade for Quality, in sync with high profitability. Its 0.35 beta justifies its B grade for Stability.
MRK is ranked #20 out of 164 stocks in the Medical - Pharmaceuticals industry. Click here to access MRK’s Growth, Momentum, and Sentiment ratings.
Bottom Line
MRK is trading above its 50-day and 200-day moving averages of $108.65 and $100.55, respectively, indicating an uptrend. As Keytruda is scheduled to lose its patent protection in 2028, acquiring Prometheus Biosciences will likely drive its long-term growth. Citi analyst Andrew Baum expects peak sales of $20 billion for PRA023 post-approval, which will likely provide a 15% to 30% boost to long-term earnings.
Given its solid dividend payouts, discounted valuation, strong historical growth, and high profitability, it could be wise to buy the stock now.
How Does Merck & Co., Inc. (MRK) Stack up Against Its Peers?
MRK has an overall POWR Rating of B, equating to a Buy rating. You might want to consider investing in the following Medical - Pharmaceuticals stocks with an A (Strong Buy) rating: Novo Nordisk A/S (NVO), Takeda Pharmaceutical Company Limited (TAK), and Johnson & Johnson (JNJ).
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
MRK shares were trading at $113.64 per share on Thursday morning, down $0.49 (-0.43%). Year-to-date, MRK has gained 3.14%, versus a 8.25% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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