AI-Driven Semiconductor Surge Powers Healthcare And Electronics To New Heights

Key Takeaways

• Strong growth in semiconductor solutions and life sciences boosts Merck's Electronics and Process Solutions sectors, positively impacting future revenue and earnings.
  
• Robust healthcare sector sales in oncology and neurology, plus geographical diversification, enhance stability and potential for sustained revenue growth.
  
• Competitive pressures, currency impacts, and muted demand in key segments could hinder revenue and long-term growth across pharmaceuticals, science solutions, and electronics.

Catalysts

Operates as a science and technology company in Germany.

• Merck KGaA is seeing strong growth in its semiconductor solutions segment due to high demand for AI and advanced nodes, which is expected to drive continued growth in its Electronics sector, impacting future revenue and earnings positively.
  
• The Process Solutions business within Life Science has returned to organic growth and shows sequential improvement, raising confidence in future order intake and sales growth, which will benefit revenue and potentially net margins.
  
• Merck's Healthcare sector continues to show robust organic sales growth, particularly in oncology and neurology & immunology, supported by strong sales of existing products like Erbitux and the potential of new pipeline developments, positively impacting future earnings and revenue.
  
• Strong performance in European and Asia-Pacific regions, despite currency headwinds, is diversifying growth sources and providing resilience, which should contribute to stable revenue growth and improved net margins over time.
  
• The anticipated gradual recovery in end-market demand in both Life Science and Electronics, backed by structural trends and a return of normal order cycles, provides confidence for sustained future revenue and earnings growth.

Merck KGaA Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Merck KGaA's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.9% today to 16.4% in 3 years time.
• Analysts expect earnings to reach €3.9 billion (and earnings per share of €9.0) by about December 2027, up from €2.7 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €3.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.1x on those 2027 earnings, down from 23.3x today. This future PE is greater than the current PE for the GB Pharmaceuticals industry at 19.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.26%, as per the Simply Wall St company report.

Merck KGaA Future Earnings Per Share Growth

Risks

• Competitive pressures, such as the increased competition faced by Bavencio in the U.S. market, may lead to reduced organic sales growth in certain pharmaceuticals, potentially impacting revenue and net margins in the Healthcare sector.
  
• The ongoing challenge of adverse currency impacts, which were noted as a 2 percentage point headwind on sales and a 5 percentage point headwind on EBITDA pre, could continue to impact reported revenues and profitability.
  
• The muted demand from the pharmaceutical sector, especially in North America, which affects the Science and Lab Solutions segment, may result in slowing organic growth or revenue declines in that area, potentially impacting overall revenue growth.
  
• A potential slowdown in the ramp-up of R&D spending and commercial activities, currently at a low level, if not reversed, could impact long-term growth trajectories, affecting future earnings growth potential.
  
• Delays in DS&S project business growth due to the pushout into 2025 or beyond may lead to softer sales contributions from Electronics in the upcoming quarters, impacting revenue growth in this segment.

Valuation

• The analysts have a consensus price target of €183.75 for Merck KGaA based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €199.0, and the most bearish reporting a price target of just €160.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €23.8 billion, earnings will come to €3.9 billion, and it would be trading on a PE ratio of 23.1x, assuming you use a discount rate of 4.3%.
• Given the current share price of €144.2, the analyst's price target of €183.75 is 21.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.