Merck (NYSE: MRK) recently reported its Q2 results, with revenues and earnings exceeding our estimates. The company garnered $16.1 billion in revenue and adjusted earnings of $2.28 per share, compared to our estimates of $15.9 billion and $2.20, respectively. The growth was primarily driven by higher sales of Keytruda. However, the company lowered its full-year earnings outlook, resulting in its stock falling around 10% post the results’ announcement. Although Merck posted an upbeat Q2, and despite its recent fall, we think its stock is fully valued at levels of around $115. 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 gains of around 45% from levels of $80 in early January 2021 to around $130 now, broadly aligning with the returns for the S&P 500 over this period. MRK is one of a handful of stocks that have increased their value in each of the last three years, but that still wasn’t enough for it to consistently beat the market. Returns for the stock were 2% in 2021, 49% in 2022, and 1% 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 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 $120 per share, close to its current market price of $115. At its current levels, MRK stock is already trading at 4.9x trailing revenues, compared to the 4.5x average P/S ratio seen over the last five years.
Merck’s revenue of $16.1 billion in Q2 was up 7% y-o-y, driven by continued market share gains for Keytruda, which saw a 16% y-o-y jump in sales to $7.3 billion. However, Gardasil sales grew just 1% to $2.5 billion, due to shipment issues in China. The company saw its adjusted gross margin expand by 430 bps to 80.9% due to favorable product mix. Higher revenues and margin expansion resulted in a bottom line of $2.28 on an adjusted basis, versus a loss per share of $2.06 in the prior-year quarter.
Looking forward, Merck should continue to benefit from the label expansion of Keytruda, and we think that the shipment issue with Gardasil will likely be short-lived, and it should continue to see better sales growth in the coming quarters. The company’s recent acquisitions, including Prometheus, Acceleron, Imago, Harpoon Therapeutics, and EyeBio, will further bolster its top and bottom-line growth in the coming years. Merck lowered its full-year 2024 earnings outlook to now be in the range of $7.95 and $8.04 per share, versus its prior estimate of $8.53 and $8.65 per share, primarily due to one-time charges associated with the acquisitions of Harpoon Therapeutics and EyeBio.
Overall, Merck posted upbeat Q2 results. However, lower sales growth for Gardasil and downward revision to the earnings forecast was a slight led down. From a stock valuation perspective, we think Merck is fully priced at levels of around $115.
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.
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