Merck (NYSE: MRK) stock has fallen sharply by 22% this year, underperforming the S&P 500 index, which declined only 1%. This drop is mainly due to lowered guidance for 2025 and concerns about the future growth of its key drugs, Keytruda and Gardasil.
Weak Gardasil sales in China and the approaching end of Keytruda’s patent exclusivity in 2028 have unsettled investors.
Despite these challenges, Merck’s stock may already reflect these negatives in its price. The company’s valuation is currently low compared to its financial performance and historical health.
Analysis of Merck’s growth, profitability, financial stability, and resilience during downturns shows strong operating results and solid financial footing.
Valuation Compared to the Market
Merck appears undervalued relative to the broader market:
Price-to-sales ratio: 3.1 vs. 3.0 for S&P 500
Price-to-free cash flow ratio: 9.4 vs. 20.5 for S&P 500
Price-to-earnings ratio: 11.3 vs. 26.4 for S&P 500
Revenue and Profitability
Merck’s revenue growth has been modest but steady:
Average revenue growth over three years: 5.8% (S&P 500: 5.5%)
Revenue rose 4.1% in the last 12 months to $64 billion
Recent quarter revenue declined 1.6% to $16 billion
Profit margins are strong:
Operating margin: 31.9% (S&P 500: 13.2%)
Operating cash flow margin: 32.7% (S&P 500: 14.9%)
Net income margin: 27.3% (S&P 500: 11.6%)
Financial Stability and Downturn Resilience
Merck maintains a healthy balance sheet:
Debt-to-equity ratio: 17.7% (S&P 500: 19.9%)
Cash-to-assets ratio: 12.0% (S&P 500: 13.8%)
The stock has shown resilience in past downturns, often outperforming the S&P 500 during market crashes such as the inflation shock in 2022 and the COVID-19 pandemic in 2020. However, it did suffer a steep 65.5% drop during the 2008 financial crisis.
Outlook and Risks
Merck’s strong profitability and low valuation make it an attractive buy. Analysts forecast potential price increases, with some predicting a rise to around $113.71 in the next year, reflecting a 46.6% gain. Long-term forecasts suggest even higher growth by 2030.
However, risks remain. Continued weakness in Gardasil sales and slowing growth of Keytruda as its patent expires could pressure revenues and stock price. Investors should weigh these risks carefully.
For those seeking less volatility, diversified portfolios like the Trefis High Quality portfolio, which has outperformed the S&P 500 with lower risk, may be preferable.
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