Merck & Co. (MRK) released a statement on January 25 stating that it had discontinued its COVID-19 vaccine research following disappointing clinical trial results. Its stock has declined 9.6% over the past month, due primarily to a lack of investor confidence. Indeed, MRK's laggardly vaccine development over the past year in a highly competitive race has contributed to an 11.8% decline in its stock price over the past year.
Having given up on the vaccine race, MRK plans instead to devote its research and production capabilities to two therapeutic candidates – MK-4482 and MK-7110. In addition, the company has been making notable progress in its cancer drug research.
Given its price performance over the past couple of months, the stock is currently trading at a discount to its peers. But it we think it has growth potential based on its distinctive product pipeline.
Here is why I think MRK is a solid value pick:
Inexpensive Valuation
In terms of non-GAAP forward p/e, MRK is currently trading at 11.64x, 56.5% lower than the industry average of 26.76x. MRK’s non-GAAP forward PEG ratio of 1.43x is 39.6% less expensive than the industry average of 2.37x.
The company’s forward price/sales of 3.65x and forward price/cash flow of 9.55x are lower than the industry averages of 10.34x and 17.39x, respectively.
Distinctive Product Pipeline
Though MRK’s decision to quit its COVID-19 vaccine research came as a shock to its investors, its research generally has been directed to fruitful drug development. MK-7110 is potentially the first drug to be developed to treat the inflammatory side effects of coronavirus. Interim results from phase three clinical trials have demonstrated the drug’s greater than 50% efficacy. Its antiviral drug agent MK-4482 is currently in the initial stages of development, in partnership with Ridgeback Rio.
MRK has been making progress in its standard drug pipeline also. On January 26, MRK’s KEYTRUDA received the European Union’s approval for first line treatment of adult colorectal cancer. And on February 1, the drug received approval from the Committee for Medicinal Products for Human Use for European Medicines Agency (EMA).
Also this month, MRK’s VERQUVO received approval from the U.S. FDA, for treating chronic heart failure.
Robust Financials and Growth Potential
MRK’s revenues and EBIT have increased at CAGRs of 6.2% and 22.7%, respectively, over the past three years. The company’s net income has grown at a CAGR of 43.5% over the past three years, while its EPS increased at a CAGR of 47.3% over this period. Its tangible book value increased at a CAGR of 150% over the same period.
MRK is expected to maintain this growth pace in the coming months. Analysts expect the company’s EPS to rise 10% in the current quarter, and 10.4% in the current year. A consensus revenue estimate of $52.45 billion for fiscal 2021 represents a 9.3% improvement year-over-year.
Price Target and Analyst Ratings Indicate Upside
MRK is currently trading 14.5% below its 52-week high of $87.80, which it hit on September 3. Analysts expect the stock to soon break out from this resistance level to hit fresh highs of $96.52, representing a potential 28.6% upside. Of 24 Wall Street analysts that rated the stock, seven rated it “Strong Buy” and 12 rated it “Buy.”
POWR Ratings Show Promise
MRK has an overall rating of A, equating to Strong Buy in our proprietary POWR Ratings system.
The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
MRK has a B grade for Value, Sentiment, Quality and Stability. It is a profitable stock; its trailing 12-month gross profit margin of 72.01% is significantly higher than the category average of 55.94%.
In the 240-stock Medical – Pharmaceuticals industry, MRK is ranked #11. You can check out MRK’s ratings for Growth and Momentum here.
There are 11 other stocks in the Medical – Pharmaceutical industry with an overall rating of A. Click here to see them.
Bottom Line
MRK’s recent price dip can be attributed to its poor COVID-19 vaccine development experience. Given the company’s existing drug pipeline and several other medications in the development stage, however, we think MRK should gain significant traction soon.
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MRK shares were trading at $74.72 per share on Wednesday afternoon, down $0.32 (-0.43%). Year-to-date, MRK has declined -8.66%, versus a 4.24% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.
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