- Merck & Co. is a large legacy company that makes a profit, pays a consistent dividend, and is a familiar and dependable company. That sometimes makes for boring.
- Analysts have a consensus target price in the mid-$90s while it might be undervalued by over 50%.
- Merck develops and sells prescription medicines, vaccines, biological therapies, with a special emphasis on women’s health, and animal health products.
Dependable and Familiar Make for Boring
Profit is fiction for many of the hottest companies. Profit, once the vital factor for investors, is now passé. Merck & Co. (NYSE:MRK) is a victim of its own success:
- Merck & Co is an old large legacy company that is familiar to investors and traders.
- MRK makes a profit in the billions of dollars each year.
- MRK pays a consistent dividend.
- The share price sells far below the consensus of its valuation.
- Over 20 analysts rate MRK with a strong-buy, buy and hold if you own.
- Merck sells the most popular immunology drug for treating cancer. The company expects sales to double over five years.
- Daily trading volume hovers at about 8.5M shares in contrast to the average +12M.
- Merck’s 74K employees develop and sell a broad portfolio of prescription medicines, vaccines, biological therapies, with a special emphasis on women’s health, and animal health products.
- Merck spends $13.6B a year on R&D.
Retail investors buying MRK are making a dependable buy. That’s not a glitzy description but a hallmark in a consequential decade of siren stock trading.
Merck & Co. share price and trading volume flatlined, and no one seems to care. There’s no rush to get her to the emergency room. No one is grabbing chest paddles to shock the stock or applying compressions. The healers, analysts, are optimistically bullish. They are encouraging investors to buy, but the narrative isn’t a resounding payoff despite a target price of $95; some rate the fair value to top $163 per share, i.e., 53% higher than shares are selling. Astoundingly, MRK is up a measly 4.46% over the past year, closing out Q1 ’21 at $77.09.
Strong Ratings Make for a Promising Outlook
We have been buying shares at prices yielding a dividend cumulatively greater than the current 3.37% (FWD) yield. Seeking Alpha gives MRK an A- rating for Yield and Consistency. A recent upgrade garnered the dividend a C+ for Growth. We recently added more shares to our portfolio, because the dividend is safe and the share price is cogent. Growth is slow because large legacy companies are dependable and familiar but not romantic; they synchronize operations delicately balancing the coordination of R&D investments and product development.
This status limits the stock’s Momentum, while voguish players enjoy fame and rocketing share price. But “the risks are also above-average in momentum stocks.” The health sector is notorious for above-average volatility. Merck, alternatively, has a low implied volatility rank. Low volatility is a virtue for retail investors, not a vice.
Merck is a terrific Value and Profitable, according to the SA rating. Share price volatility is more linked to beating analysts’ estimates than producing profits and ROI. Merck’s annual revenue rose in 2020, though impeded by the pandemic. CAGR revenue for three years is +6.15% (+8.6% ’21 Y/Y est.). Gross Profit Margin was last reported +72% and Net Income at 14.7%. Merck has $92B in assets and $76B in liabilities. The ratio of debt (~$32B) to equity at 125% weighs on the share price, but the debt is manageable. Some debt is attributable to a one-off and acquisitions. Operating cash flow covers the debt payments. Interest payments are covered by EBIT. The company generated profits reported at the end of 2020 of $7B on revenue of $48B.
Another division, Merck Animal Health produces and sells veterinary pharmaceuticals, vaccines, education programs, books, and health management solutions and services marketed in over 150 countries. Sales are topping $1.2B annually and growing 4%-6% per year.
It’s Not Fashionable But Merck Makes Money
Bloomberg reports profit is fiction for most companies, the great financial crisis of 2007. Yet many of the health care industry companies have Momentum beyond the pale of MRK. For example, MRK has proven itself over 130 years building its Market Cap to nearly $195B. But MRK’s share price is in the mid-$70s, while three other large-cap companies have hefty valuations and trade at high premiums. The risks to investors with the latter three revolve around their capabilities to generate long-term continuing revenues and develop earnings.
One sells for $315 per share and has a market cap of $14.4B. A second sells for $545 per share with a market cap of $43B. The third sells for $385 per share and has a market cap of $56B. None of the three companies have the depth and breadth of products and services of MRK. Investors need to note that MRK heavily depends on sales of the cancer immunology drug for 30% of sales.
Source: Bloomberg per Liz Ann Sonders
Merck is an elegant company with acquisitions and partnerships laced together in a specific domain. While other biotechs and pharma companies are hot properties and more expensive, Merck lumbers along in the gray shadows of dependability and familiarity. On a Quant Ranking, SA ranks MRK 42 out of 178 in the Pharmaceuticals sector; it is 1267 out of 3938 overall in the Health Care industry. Meantime, SA Factor Grades are impressive:
Source Seeking Alpha
Quality Enhances Quantity
Merck’s determination to develop, market, and sell cancer-fighting drugs as its impresa are being rewarded with solid profits and outstanding operating cash flow. The cancer-fighting drug Keytruda is a staple for MRK and will be after the patent protection ceases in 2028. By then, it will be an immunotherapy staple fighting multiple cancers. In 2020, there were an estimated 2M fresh cases of cancer in the U. S.
Victims, the government, and insurance companies are spending sums approaching $200B annually to fight cancer. There might be 30M cases diagnosed worldwide in 2040. Merck’s Q4’20 worldwide sales were $12.5B, +5%. The novel COVID-19 pandemic tempered the diagnoses and treatments of cancer and other illnesses that proved a slight step-back for Merck in sales and profits in 2020 but there followed a notable uptick in severity of cases and mortality that will quantify over several years. Despite some softening of sales, Keytruda sales grew 30%. A second popular medication grew sales by 6%. Animal health global sales grew 7%. In March, the FDA authorized Keytruda for use in cases of esophageal cancer.
To paraphrase Chekhov, leadership requires team leaders to plan and “make plain in what direction to go.” Management at Merck has been stellar. Senior leaders undertook a transformative corporate culture assessment several years ago from the bottom up. In a report from Duke Corporate Education, Merck leaders assessed the effects on their management, organization, goals, and priorities of new technologies, product pipeline drought, business models, shifting customer needs, growth in emerging markets, and new competitors. This project was a “talent development strategy for enterprise leadership…to give talented middle managers” greater input into decision making that legacy companies might give short shrift for the sake of traditional methods. It enhances the qualitative development of a company, forfends the status quo, and sparks energy.
Two other quality moves by Merck worthy of investor note are its incubating start-ups and partnership engagements. Both activities plus acquisitions and a commitment to R&D created a high debt-to-equity ratio. In 2020, MRK acquired a vaccine developer and partnered with biotech companies and an NGO on an antiviral drug and vaccine. Most recently, Merck is buying Pandion Therapeutics (PAND), teaming up with Alkermes (ALKS) in an ovarian cancer study, with IMV (IMV) for a blood cancer study, acquired Alydia Health that will help with the expansion of sales in Europe, partnering with Gilead Sciences (GILD) in the fight against HIV, and, inter alia, the compelling panoply continues. Then there is the recent C-19 Kicker. The same strategy is used for animal health product and service advancement, and I believe, has the potential for generating enormous cash returns over the long term.
The stock is trading at a discount. I can only mention a few of the engagements undertaken. It is the strategy for distinctive product pipeline development that impresses me most; it assures growth potential in fields critical to and high on the list of human priorities.
Source: Merck Animal Health
Investors can buy this blue-chip company at a reasonable price during this period of sluggish momentum. MRK has the potential to move up between 30% and 50% during the next 52-weeks. My quantitative assessment suggests the stock is undervalued and the consistent dividend makes it a buy recommendation for retail value investors. Add to that my qualitative assessment is well-managed; management is forward-thinking and is implementing a prodigious strategy for long-term success.
The position of analysts giving MRK strong buy and buy recommendations will hold sway. They will spark greater momentum and drive the stock higher to the target price. The shares are attracting attention in a bubbling market among solid investment leaders. For instance, Warren Buffett took a billion-dollar position with MRK shares trading around 12 times expected earnings. Merck generates strong and reliable cash flow (~$11B) in an essential industry.
A note of caution. A high percentage of Merck’s revenues rely on sales and potential of one drug it is described as a “juggernaut cancer immunotherapy.”
Merck’s management views partnering as an essential strategy for growth and revenue development. The company has other healthy divisions generating sales and profits including the veterinary sector. In the case of the novel coronavirus, one deal will yield over $260M in revenue for Merck. In another partnership, MRK is co-developing and commercializing HIV treatments. The goal is to transform HIV care and enhance revenues and profits for both companies.
Source: Infront Analytics
Analysts are anticipating a stronger revenue and earnings report from Merck scheduled for April 29 ’21, then reported for the last quarter. In the meantime, shares are selling at a bargain. There are no serious downward pressures on the share price. Short Interest is just 0.73%. The PE is significantly lower than others (15 average) in its sector. The current PE is lower than its five-year average of 14.7. Merck at its current sale price offers an excellent opportunity for retail value investors for growth and profits.
In the interest of full transparency, let me share that my wife first insisted we buy Merck after delivering our first baby four decades ago. She noticed the plethora of equipment and medicines emblazoned with the Merck trademark. Her direction was to buy. This company will grow with our son. It did and we opted for dividend reinvestment. Though MRK is flatlining on price and momentum, watch for its revival.
This article was written by
Analyst’s Disclosure: I am/we are long MRK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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