Is Merck’s 21% Price Surge Justified After Excitement Over Oncology Pipeline?

• Ever wonder whether Merck is trading at a bargain or getting a bit pricey? You are not alone, and that question is exactly what we are here to unpack together.
• In the past month, Merck's stock price has surged 20.8%, with a solid 7.0% gain just in the last week. This points to shifting investor sentiment and growth potential.
• Recent headlines around Merck focus on growing excitement about its oncology pipeline and FDA fast-track designations. Both of these factors have contributed to market optimism. At the same time, ongoing patent disputes and new partnership announcements are shaping the stock’s narrative and price movements.
• When it comes to valuation, Merck scores a strong 5 out of 6 on our value checks, indicating it is considered undervalued in almost every measure we use. Let’s break down the familiar valuation approaches first. Be sure to stay for a perspective at the end that could change how you judge Merck and any stock going forward.

Find out why Merck's 6.8% return over the last year is lagging behind its peers.

Approach 1: Merck Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow (DCF) model estimates a company's intrinsic value by projecting its future cash flows and discounting them back to today’s dollars. This method aims to determine what those future cash flows are worth right now.

For Merck, the model uses a 2 Stage Free Cash Flow to Equity approach. The company’s current Free Cash Flow is about $13.12 billion. Analyst estimates extend out five years, predicting ongoing growth. By 2029, projected Free Cash Flow rises to $24.95 billion, and over the next decade, Simply Wall St extrapolates annual cash flows, showing continued expansion of Merck’s business.

After discounting these future cash flows back to present value, the resulting intrinsic value per share is $216.23. Based on Merck’s current share price, this model suggests the stock is trading at a 51.6% discount to its estimated intrinsic value.

This assessment points clearly to the stock being undervalued at today’s prices.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Merck is undervalued by 51.6%. Track this in your watchlist or portfolio, or discover 922 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

The price-to-earnings (PE) ratio is a popular way to value profitable companies because it directly links a company’s current share price to its underlying earnings. For investors, PE makes it straightforward to compare profitability and valuation across businesses of different sizes within the same industry.

A company’s “normal” or fair PE ratio is influenced by factors like earnings growth expectations and associated risks. Generally, higher growth or lower risk supports a higher PE, while slower-growth or riskier businesses usually warrant a lower PE multiple.

Currently, Merck trades at a PE of 13.6x. For context, the pharmaceuticals industry averages a PE of 20.6x, and Merck's peers trade closer to 18.2x. This shows Merck is priced considerably below both industry and peer averages, suggesting a potential undervaluation at first glance.

To provide further context, Simply Wall St calculates a Fair Ratio of 29.2x for Merck. This proprietary measure factors in the company’s industry, market cap, expected earnings growth, profit margin, and specific company risks, giving a more tailored benchmark than a simple industry average.

Comparing Merck’s current PE of 13.6x to its Fair Ratio of 29.2x reveals the shares are trading well below what would be considered fair value for its current earnings profile. This suggests the market is discounting Merck more than the numbers support.

Result: UNDERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1440 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Merck Narrative

Earlier, we mentioned that there is another way to understand valuation. Let us introduce you to Narratives. A Narrative goes beyond just the numbers by allowing you to create a story behind your fair value estimates. It is how you link your view of Merck's business, such as its new products, strategy, risks, and future prospects, to a financial forecast and ultimately a fair value per share.

Available on Simply Wall St's Community page and used by millions of investors, Narratives make it easy to connect your perspective to cash flow and earnings forecasts. This helps you decide how Merck's current price compares to your calculated Fair Value. Narratives are dynamic, updating as new news, earnings, or company updates come in, so your valuation stays relevant when the facts change.

For Merck, one investor might build a bullish Narrative focused on strong oncology launches and a growing pipeline, seeing fair value as high as $141 per share. Another could highlight risks from patent expiries and pricing pressure, putting fair value closer to $82. This allows you to quickly see how your assumptions compare and adjust as the story evolves.

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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