Is Merck Attractively Priced After Pipeline Success Drives 8.4% Rally?

• Wondering whether Merck’s stock is trading at a bargain or a premium? You’re not alone. The answer might surprise even the most seasoned investors.
• Merck’s share price has been on a bit of a rollercoaster, jumping 2.2% over the past week and 8.4% in the last 30 days. However, it is still down 4.2% year-to-date.
• Much of this recent movement was sparked by upbeat developments in Merck’s drug pipeline, particularly positive clinical trial updates for their oncology treatments and new regulatory approvals making headlines. These milestones have kept investor interest high despite broader market volatility.
• On the valuation front, Merck earns a solid 5 out of 6 on our undervaluation checks. We will dig into the details behind this number and explore traditional valuation techniques, but keep an eye out for a simpler and even more insightful way to judge Merck’s true value by the end of this article.

Find out why Merck's -1.4% return over the last year is lagging behind its peers.

Approach 1: Merck Discounted Cash Flow (DCF) Analysis

The Discounted Cash Flow (DCF) model estimates the value of a company by projecting its future cash flows and then discounting those values back to today. This helps investors determine what a company's shares should be worth based on expected earnings potential.

For Merck, the model uses its latest twelve months free cash flow, which is $13.1 Billion. Analysts provide annual cash flow estimates for the next five years, and these are expected to rise, with projections reaching up to $24.95 Billion by 2029. In addition, Simply Wall St extrapolates additional growth estimates, steadily increasing out to 2035 based on reasonable assumptions.

All cash flows are calculated in US dollars. According to this analysis, Merck's intrinsic value is estimated at $216.23 per share. With the stock currently trading at a 56.1% discount to this valuation, the DCF suggests that Merck is significantly undervalued in today's market.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Merck is undervalued by 56.1%. Track this in your watchlist or portfolio, or discover 925 more undervalued stocks based on cash flows.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Merck.

Approach 2: Merck Price vs Earnings (PE Ratio)

The Price-to-Earnings (PE) ratio is one of the most widely used valuation tools for companies that generate consistent profits, like Merck. It reflects what investors are willing to pay today for each dollar of the company’s earnings, making it particularly useful when profitability is steady and reliable.

Growth expectations and perceived risks play a central role in determining what counts as a “normal” or “fair” PE ratio. Companies with strong expected earnings growth or low risk typically command higher PE multiples, while slower-growing or riskier firms trade at lower ones. For this reason, simply comparing PE ratios requires more context. Industry trends and a company’s prospects both matter.

Currently, Merck trades at a PE ratio of 12.4x. This is notably below the Pharmaceuticals industry average of 19.4x and also well under the peer average of 17.1x, suggesting investors may not be fully recognizing Merck’s potential.

To refine our view, we turn to Simply Wall St’s “Fair Ratio,” which is 28.3x. This proprietary metric incorporates unique factors like Merck’s projected earnings growth, industry status, profit margins, market cap, and risk profile to deliver a tailored benchmark. Unlike a simple industry or peer comparison, the Fair Ratio adjusts for these specifics and provides a clearer view of what a reasonable multiple should be.

With Merck’s current PE sitting at just 12.4x, which is far below its Fair Ratio of 28.3x, the analysis suggests the stock is undervalued on an earnings basis.

Result: UNDERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1423 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Merck Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let's introduce you to Narratives. A Narrative is more than just numbers on a page. It is a clear, personalized story that connects your view of Merck’s future to tangible financial forecasts and a fair value estimate. Instead of relying solely on past metrics, Narratives let you map your assumptions about Merck’s revenue growth, margins, and risks, essentially building your own case for whether the stock is a buy or a sell.

Narratives are an easy and widely accessible feature available on Simply Wall St’s Community page, where millions of investors use them to see or share their perspectives. With a Narrative, you can visualize how changes in headlines, earnings results, or market news automatically update your fair value, helping you make smarter decisions about buying or selling as the story evolves. For example, one user might be bullish about Merck’s tripled pipeline and forecast a fair value as high as $141, while another may focus on risks like regulatory changes and set their value closer to $82. Each Narrative reflects their unique outlook and automatically recalculates as new data arrives.

Do you think there's more to the story for Merck? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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