Merck (NYSE: MRK) recently announced its first-quarter results, exceeding Wall Street’s expectations for both earnings and revenue. The company reported revenues of $15.53 billion and adjusted earnings per share of $2.22, surpassing consensus predictions of $15.31 billion and $2.14, respectively. This strong performance was fueled by consistent sales growth of Keytruda. However, sales of Gardasil saw a marked decline due to diminished demand in China. Despite the favorable Q1 outcomes, Merck adjusted its forecast for 2025 downwards, citing an estimated $200 million in tariff-related costs.
After the earnings announcement on Friday, April 25th, Merck’s (MRK) stock price rose by 4%. However, year-to-date, MRK stock has lagged behind the S&P 500 Health Care index, registering a return of -17% compared to the index’s 0.2% gain. This underperformance is partly attributable to the issues encountered by its HPV vaccine, Gardasil, in China due to lower demand.
If you are looking for upside potential with less volatility than that of individual stocks, the Trefis High Quality portfolio offers an alternative, having outperformed the S&P 500 and delivered returns exceeding 91% since its inception.
How Did Merck Perform in Q1?
In the first quarter, Merck’s revenue of $15.53 billion reflected a 2% decrease compared to the previous year. This downturn occurred despite ongoing growth from Keytruda, which experienced a 4% year-over-year increase in sales, reaching $7.2 billion. Additionally, Merck’s newer medications, Winrevair and Capvaxive, are gaining market share. In contrast, Gardasil sales suffered a significant 41% drop year-over-year to $1.3 billion, largely due to sustained weak demand in China.
Merck’s adjusted gross margin improved by 40 basis points to 78%, thanks to a favorable product mix. The company’s adjusted earnings per share reached $2.22. It’s important to mention that the first quarter of 2024 included a $0.26 per share charge related to the acquisition of Harpoon Therapeutics, which affects the year-over-year comparison of the bottom line.
Looking forward, Merck maintains its revenue guidance for the entire year 2025, anticipating sales between $64.1 billion and $65.6 billion. However, the firm has revised its adjusted earnings per share forecast to a range of $8.82 to $8.97, citing an estimated $200 million in incurred tariff costs to date.
What Are the Implications for Merck Stock?
While Merck’s first-quarter results were encouraging, the adjusted outlook indicates a slight decrease in margins and earnings. We estimate Merck’s valuation at $109 per share, indicating substantial upside potential of 30% from the current trading price of $83. Currently, MRK stock trades at a price-to-earnings (P/E) ratio of 11 times its trailing earnings per share of $7.79, which is below the stock’s historical average P/E ratio of around 14 times.
Taking into account the strong growth trajectory of Keytruda and the increasing momentum of Merck’s new drug launches, we believe the current lower valuation multiple represents an attractive investment opportunity for long-term investors. In addition, the company’s recent strategic acquisitions, including Prometheus Biosciences, Acceleron Pharma, Imago BioSciences, Harpoon Therapeutics, and EyeBio, are expected to drive both revenue and earnings growth in the upcoming years.
Learn more about Trefis RV strategy that has outperformed its all-cap stocks benchmark (a combination of all three: the S&P 500, S&P mid-cap, and Russell 2000), generating strong returns for investors. Separately, if you seek upside with a more stable experience than an individual stock like Merck, consider the High Quality portfolio, which has outperformed the S&P and achieved returns exceeding 91% since its inception.
Read the full article here
