To The Moon

$Merck(MRK)$

Merck, trading under the ticker symbol MRK, is currently priced at $99.50 per share. Over the past six months, the stock has experienced a 27% decline, reflecting significant pressure. Despite this, Merck boasts a robust product portfolio, including blockbuster drugs that are key revenue drivers. These products have strong market shares and considerable long-term growth potential.

Today, we’ll analyze Merck using my automated stock valuation spreadsheet. We'll employ models like the Discounted Free Cash Flow (DCF), Comparable Company Analysis, Dividend Discount Model (DDM), and Ben Graham's Intrinsic Value Formula to determine whether Merck is a buy or sell.

Earning Overview

In the third quarter of 2024, Merck & Co., Inc. reported worldwide sales of $16.7 billion, marking a 4% increase compared to the same period in 2023. Excluding the impact of foreign exchange, sales growth was 7%.

Fundamental Analysis

Merck also has a diverse pipeline targeting oncology and infectious diseases, supported by continuous R&D investments aimed at future growth and innovation. Additionally, the company offers a stable dividend payout, with a dividend yield of 3.29%, making it appealing for dividend investors.

Revenue Dependency on Keytruda: A significant portion of revenue comes from Keytruda, making the company vulnerable to patent expirations and competition.

Recent Stock Underperformance: A 23.61% decline over six months has raised concerns about valuation and growth potential.

Rising R&D Costs: High R&D expenses (~17% of revenue) could pressure margins if pipeline developments underperform.

Guidance

Merck revised its full-year 2024 revenue guidance to a range of $63.6 billion to $64.1 billion, reflecting a slight decrease from previous estimates. The adjusted EPS forecast was also lowered to between $7.72 and $7.77.

As of January 2, 2025, Merck & Co., Inc. (MRK) has not yet released its fourth-quarter (Q4) 2024 earnings report or specific guidance for that quarter. The company is scheduled to announce its Q4 2024 financial results on February 4, 2025.

In their third-quarter (Q3) 2024 earnings report, Merck reported total worldwide sales of $16.7 billion, marking a 4% increase compared to Q3 2023. This growth was primarily driven by strong performance in their oncology and vaccines segments.

For the full year 2024, Merck has provided the following guidance: Revenue: Projected to be in the range of $62.7 billion to $64.2 billion. (EPS): Expected between $8.44 and $8.59.

Free Cash Flow

Revenue Growth: If revenue reaches the midpoint of analysts' estimates ($70.5 billion) with net income margins around 17%, Merck's net income would be approximately $11.99 billion.

Net Income to FCF Conversion: Using a net income-to-FCF conversion ratio (historically around 80–90%), 2024 FCF could range between $9.6 billion and $10.8 billion.

Operating Cash Flow and CapEx: Assuming operating cash flow grows proportionally with revenue and CapEx continues its downward trend, FCF could trend closer to $11 billion, depending on expense management.

Technical Analysis

Undervalued Metrics: The stock’s PE ratio of 20.78 is well below the S&P 500 average, signaling relative undervaluation. Analysts’ price targets (~$129) suggest 30%+ upside potential.

Lower Volatility: With a beta of 0.39, MRK is less volatile than the broader market, making it attractive during periods of economic uncertainty.

Risks and Challenges

Regulatory Risks: Stricter drug pricing regulations and approval delays could impact profitability.

Patent Expirations: Keytruda and other leading drugs face looming patent cliffs, which could affect long-term revenues.

Competition: Rivalry from companies like Pfizer, AbbVie, and Bristol-Myers Squibb could erode market share.

Valuation

Discounted Free Cash Flow (DCF): Using reasonable assumptions for revenue growth and net income margins, the DCF model indicates a valuation of $150–$170 per share, suggesting a 72% discount at the current price.

Dividend Discount Model (DDM): Factoring in a 6% growth rate and an 8.5% discount rate, the DDM values the stock at $130 per share, confirming a discount.

Ben Graham Formula: Using earnings and growth estimates, the intrinsic value is calculated at $128 per share, reinforcing the stock's undervaluation.

Comparable Company Analysis: Compared to peers like Pfizer (PFE) and AbbVie (ABBV), Merck shows strong profitability and competitive valuation metrics. Based on enterprise value and revenue multiples, the model estimates Merck’s value at $140 per share.

Market sentiment

• Recent Price Decline: A 27% drop over six months may indicate waning investor confidence, possibly due to broader pharmaceutical sector challenges or company-specific concerns.

• Earnings Pressures: Despite profitability improvements, Merck’s net income and free cash flow remain below their 2021–2022 highs, raising concerns about sustained growth.

• Competitive Landscape: Increasing competition from peers like Pfizer, AbbVie, and Bristol-Myers Squibb could impact Merck's market share and pricing power in key therapeutic areas.

Conclusion

Across all valuation methods, Merck appears undervalued, with target prices consistently around $130–$150 per share. This makes it a compelling buy opportunity for both growth and income-focused investors.

Merck presents a compelling investment opportunity, supported by strong fundamentals, an undervalued stock price, and a solid growth trajectory. While risks like patent expirations and regulatory changes exist, the company's diversified pipeline and financial stability position it well for the future.

Thank you for reading!

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