June 3, 2023

Merck & Co. (MRK) is a global health care company that provides innovative health solutions through its prescription medicines, vaccines, biologic therapies, and animal health products.

Merck’s operations are primarily organized on a products-basis and comprise two operating divisions: Pharmaceuticals and Animal Health.

Some of the company’s latest developments include the completion of its previously announced spinoff of its women’s health and biosimilar portfolio into Organon & Co. (OGN) last summer, and its acquisition of Acceleron Pharma a few months ago. Merck also announced its antiviral drug, Molnupravir, in October, which was effective in reducing the risk of hospitalizations and deaths by 50% for patients with COVID-19.

I am neutral on the stock.

Merck’s Latest Results

Merck Q3-2021 results were rather robust, with revenues growing by 20% to $13.2 billion. Adjusted net income was $4.4 billion, or $1.75 per share, a notable improvement compared to $3.4 billion, or $1.37 per share, in the comparable period last year.

More specifically, Pharmaceutical revenues increased 18% to $11.5 billion, with Keytruda continuing to perform strongly, recording sales growth of 22% to $4.5 billion. Keytruda sales are likely to continue growing rapidly, going forward, as the company continues to capture a larger market share over time.

Regarding Merck’s HPV vaccine, Gardasil, sales grew 68% to $1.9 billion driven by strong global demand, particularly in China, which also benefitted from its enhanced supply, as well as in the United States, which benefitted from the timing of public sector purchases. Merck’s Animal Health segment also recorded a 16% growth in revenues, which reached $1.4 billion, backed by strength in all geographies and species.

Merck forecasts revenues to land between $47.4 billion to $47.9 billion for FY-2021, up from $46.4 billion to $47.4 billion previously. This implies approximately a 15% improvement year-over-year at the midpoint. The company expects adjusted EPS to be in a range of $5.65 to $5.70 for the year, revised from $5.47 to $5.57 previously.

Merck Dividend and Valuation

Merck paused its dividend growth from 2005 to 2012, as its earnings had struggled to develop during this period. Since then, however, the company has grown its dividend every year sequentially. Merck now numbers 10 years of consecutive annual dividend increases, featuring a CAGR of 10.3% during this period. The latest dividend hike was by 6.6%.

At the midpoint of management’s guidance, the dividend payout ratio stands at just under 50%, which, along with Merck’s ongoing growth, could indicate that dividend growth will likely continue at a satisfactory pace in the medium term.

Assuming EPS of $5.68 for the year, the stock is currently trading with a P/E of 13.5 attached. Hence, I believe the stock is in value territory at the moment. Considering that the stock’s historical P/E has hovered around 15, I find the possibility for a decent valuation expansion quite strong, especially following a more substantial dividend hike going forward.

Wall Street’s Take

Turning to Wall Street, Merck & Company has a Moderate Buy consensus rating, based on eight Buys and nine Holds assigned in the past three months. At $90.31, Merck & Company’s stock price prediction suggests 17.8% upside potential.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

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