Should You Buy Merck Shares After a Cheerful Second Quarter?

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Merck stock (NYSE: MRK) reported its Q2 results last week, with earnings and earnings well above ours and street estimates. However, MRK stock is down about 4% in a week, amid growing concerns about drug pricing. After the recent decline, we believe MRK stock has some room for growth and may see higher levels as discussed below.

Merck’s turnover of $14.6 billion in the second quarter, up 28% yoy, and earnings per share of $1.87 reflected significant 3x growth. This matches our estimates of $13.9 billion and $1.73, respectively. Revenue growth was led by higher sales of its blockbuster drug – Keytruda (up 26% to $5.3 billion) – and Gardasil (up 36% to $1.7 billion).

Given the positive results, the company raised its full-year 2022 revenue forecast to between $57.5 and $58.5 billion, including headwinds from the strengthening dollar. It also narrowed earnings expectations to now be in the $7.25 and $7.35 per share range and adjusted.

Overall, Merck’s second quarter results were solid, with market share gains for its leading drugs. A decline in its diabetes portfolio was expected given the loss of market exclusivity in China and will lose that for Europe next month. Merck sees inorganic growth to expand its pipeline. It is reportedly in talks to acquire Seagen Inc. for a deal value that could exceed $40 billion. This acquisition, if successful, subject to regulatory approval, is likely to be viewed as a positive for Merck, enhancing its portfolio of cancer drugs. Seagen’s flagship products are Padcev, Tukysa and Adcetris, each a potentially blockbuster drug that can help Merck deliver more robust sales growth.

Given the recently announced results and outlook, we have updated our model and revised our estimates. We expect full year 2022 revenue to be $58.0 billion, within the range provided by the company, but earnings will be $7.38, slightly ahead of estimates.

we estimate Merck’s appreciation at $102 a share, reflecting a 15% increase from the current market price near $88, implying that investors may be better off using the recent dip to enter MRK stocks for long-term gains.

Our valuation is based on a future P/E ratio of less than 14x based on our full year 2022 earnings forecast of $7.38 per share. At current levels, MRK stock is trading at less than 12x its future gains, compared to the last three-year average of 13x, implying some more room for growth. We assigned a slightly higher earnings multiple to Merck (compared to levels in recent years) due to an expected increase in revenues in the coming years as key drugs continue to gain market share.

While it may seem like MRK stocks have more room for growth, it’s helpful to see how: Merck’s colleagues rate on metrics that matter. Other valuable comparisons for companies in different sectors can be found at Pear Comparisons.

In addition, the Covid-19 crisis has led to many price discontinuities that can provide attractive trading opportunities. For example, you will be amazed at how counterintuitive stock valuation is xylem vs. Merck.

Despite rising inflation and the Fed’s rate hike, Merck’s stock is up 14% this year. But can it fall from here? See how low Merck stocks can go by comparing the decline in past market crashes. Here’s a performance breakdown of all stocks in past market crashes.

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