Healthcare stalwart Merck & Co., Inc. (MRK) continues to strive toward developing its pipeline through acquisitions. The company recently 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.
In September, MRK’s Animal Health segment announced that it had signed a definitive agreement to acquire Vence, an innovator in virtual fencing for rotational grazing and livestock management, to bolster this segment’s portfolio.
Additionally, despite macroeconomic headwinds, MRK has raised and narrowed its full-year 2022 non-GAAP EPS estimate to be between $7.32 and $7.37.
The stock has gained 37% over the past year and 41.5% year-to-date to close its last trading session at $108.45. It is up 7.6% over the past month. It is trading higher than its 50-day moving average of $94.92 and 200-day moving average of $88.68, indicating an uptrend.
Here are the factors that could influence MRK’s performance:
Discounted Valuation
In terms of its forward P/E, MRK is trading at 18.44x, 28.5% lower than the industry average of 25.78x. The stock’s forward non-GAAP PEG multiple of 1.42 is 25.7% lower than the industry average of 1.91.
In terms of its forward EV/EBIT, the stock is trading at 13.04x, 25.8% lower than the industry average of 17.57x. Its forward Price/ Cash Flow multiple of 15.03 is 15.6% lower than the industry average of 17.80.
Sound Financial Growth
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 $7.38 indicates a 22.6% 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 11.7% per annum over the next five years.
Solid Profitability
MRK’s trailing-12-month EBITDA margin of 40.82% is significantly higher than the industry average of 3.55%. Its trailing-12-month net income margin of 25.88% compares to the industry average of negative 6.23%.
Its trailing-12-month ROCE, ROTC, and ROTA of 38.18%, 18.53%, and 14.25% compare to the respective industry averages of negative 39.80%, 22.01%, and 31.22%.
Reliable Dividend
The company has a record of paying steady dividends. In July, MRK declared a dividend of $0.69 per share of the company’s common stock for the fourth quarter of 2022. Its annual dividend of $2.76 yields 2.54% on the current share price. It has a four-year average yield of 2.95%.
The company’s dividend payouts have increased at a 9.6% CAGR over the past three years and a 9% CAGR over the past five years. The company grew its dividend payments for 11 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. The stock also has a B grade for Sentiment and Quality, consistent with favorable analyst estimates and higher-than-industry profitability.
In the 162-stock Medical – Pharmaceuticals industry, it is ranked #11.
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 acquisitions should diversify the company’s portfolio and lessen its reliance on its primary product, KEYTRUDA. Moreover, the company has steadily grown its top line and bottom line over the years. Given its reliable dividend payment history, this stock might be an ideal buy in 2022.
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 fell $0.38 (-0.35%) in premarket trading Tuesday. Year-to-date, MRK has gained 44.58%, versus a -15.63% 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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