Merck (MRK) Fall After Earning, Should You Buy Pharma Stock?

$Merck(MRK)$

Starting with Merck & Co., the stock is down approximately 10% shortly after the market opened. Over the past year, the company has performed poorly, with a negative return of 29%. Even over the past decade, its 52% gain has underperformed the S&P 500. Currently, the stock is trading at a new 52-week low. However, Seeking Alpha has rated it as a strong buy, and Wall Street analysts also consider it a buy. Additionally, Merck offers a dividend yield exceeding 3%, making it an attractive option for income-focused investors.

primarily due to challenges with its Gardasil vaccine and a conservative 2025 financial outlook. Merck the decision to halt Gardasil shipments to China. This move aimed to allow a local partner to reduce excess inventory and stabilize financially.

Earning Overview

So, why is the stock down? One key reason is the company’s 2025 revenue outlook, which falls short of market expectations due to a pause in vaccine shipments to China. Merck projects full-year revenue between $64 billion and $65 billion, lower than analysts’ consensus estimate of $67 billion. While this is not a massive miss, markets tend to punish companies that fail to meet expectations.

This shortfall is primarily driven by Merck’s decision to halt shipments of its Gardasil vaccine to China from February through at least mid-2025, resulting in an estimated $2 billion revenue impact. However, despite the weak guidance, Merck delivered strong Q4 earnings, reporting an EPS of $1.72—above the expected $1.62. Revenue came in at $15.62 billion, surpassing estimates of $15.49 billion. Additionally, the company posted a net income of $3.74 billion, a notable improvement from a net loss of $1.23 billion in the same quarter last year.

Revenue for the quarter grew 7% year-over-year, which is solid given that Merck is not a high-growth company. This growth rate also exceeds the 4% inflation rate, reinforcing its stability. Despite the short-term headwinds, management has demonstrated the ability to outperform expectations.

Fundamental Analysis

The company achieved worldwide sales of $15.6 billion in Q4 2024, a 7% increase from the same quarter in 2023. Sales Growth: Full-year 2024 worldwide sales reached $64.2 billion, marking a 7% increase from 2023. Keytruda Performance: The cancer drug Keytruda generated $7.8 billion in Q4 2024 sales, contributing significantly to the overall revenue.

Gardasil Challenges: Sales of the Gardasil vaccine declined by 3% to $8.6 billion in 2024, with an 18% drop in Q4 sales. This decline was attributed to economic issues and government anticorruption efforts in China, leading Merck to pause Gardasil shipments to China to reduce excess inventory.

Earnings Per Share (EPS): GAAP EPS for Q4 2024 was $1.48, while non-GAAP EPS was $1.72. The non-GAAP EPS excludes certain business development transaction charges.

Guidance

Merck provided a 2025 financial outlook with projected worldwide sales between $64.1 billion and $65.6 billion, and adjusted EPS between $8.88 and $9.03. This guidance fell short of analyst expectations, contributing to a decline in Merck's stock price.

Cash Flow

Merck also maintains a robust cash flow position, generating $18.3 billion in operating cash flow. This financial strength supports a stable and secure dividend, which currently yields above 3%.

(MRK) reported its Q4 2024 financial results on February 5, 2025. The company announced worldwide sales of $15.6 billion for Q4 2024, a 7% increase from Q4 2023. While specific figures for free cash flow in Q4 2024 were not detailed in the available sources, Merck's free cash flow for the quarter ending September 30, 2024, was reported at $15.6 billion. Given that Q4 2024 sales were $15.6 billion, it's plausible that the free cash flow for Q4 2024 was similar to or slightly higher than the Q3 2024 figure.

Market Sentiment

recently faced challenges that have impacted market sentiment for 2025. The company's stock experienced a significant decline following the announcement to halt shipments of its Gardasil vaccine to China, aiming to allow a local partner to reduce excess inventory and stabilize financially.

Additionally, Merck provided a 2025 financial outlook that fell short of analyst expectations. The company projected adjusted earnings per share between $8.88 and $9.03, below the anticipated $9.51. Despite these setbacks, analysts maintain a cautiously optimistic view of Merck's long-term prospects. The average 12-month price target for MRK is $120.80, with estimates ranging from $105.00 to $145.00. In summary, while Merck's near-term outlook for 2025 has been tempered by recent challenges, the broader analyst consensus remains positive, reflecting confidence in the company's strategic direction and product portfolio.

Valuation

From a valuation perspective, Merck appears attractive. It currently trades at a forward P/E ratio of 10.84—below both its sector median and its own five-year historical average. This valuation discount, coupled with positive earnings momentum, has contributed to Seeking Alpha and Wall Street maintaining their strong buy ratings. Analysts have set a price target of $115, implying a potential upside of 29%.

While revenue growth is expected to remain moderate (6.5% annually, below sector averages), Merck’s EPS is projected to grow at an impressive 37% annually over the next three to five years. Additionally, the company boasts strong profitability metrics, with gross margins exceeding both sector and historical averages.

In terms of intrinsic valuation, our updated analysis places Merck’s fair value at $118 per share. Applying a 10% margin of safety, we would consider buying around $106. Even after today’s drop, investors still get a 25% margin of safety, making this an appealing opportunity in the pharmaceutical sector.

Conclusion

while Merck's Q4 2024 results demonstrate strong sales growth, challenges with Gardasil in China and a conservative 2025 outlook have impacted market sentiment. For those seeking exposure to pharma, Merck’s recent dip could present a buying opportunity—especially given its strong fundamentals, attractive valuation, and solid dividend.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

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