Stock Analysis

Oral COVID-19 Treatment Might Help Merck's (NYSE:MRK) Lagging Returns

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NYSE:MRK
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After the positive earnings results, Merck & Co., Inc.(NYSE: MRK)finally broke out of the yearly range. With cancer treatment and vaccine segments leading the revenue, the stock is now almost back on the all-time high.

View our latest analysis for Merck

Earnings Results

  • Non-GAAP EPS: US$1.75 (beat by US$0.20)
  • GAAP EPS: US$1.80 (beat by US$0.45)
  • Revenue: US$13.15b (beat by US$830m)

The revenue grew 20% Y/Y, and EPS increased 96% Y/Y. The company increased the revenue and earnings forecast, now expecting between US$47.4b and US$47.9b.

The majority of the positive revenue trend was driven by the cancer treatment and vaccine segments.

Antiviral Pill and New Cancer Research Partnership

After Atea Pharmaceuticals hit the road bump with their Phase 2 trial, Merck is looking to win FDA's approval for oral antiviral COVID-19 treatment – Molnupiravir.

The drug is under development in partnership with Ridgeback Biotherapeutics L.P. The advisory committee meeting is scheduled for November 30 to discuss the medication and its effectiveness. Potential Molnupiravir sales are not part of the current revenue guidance. Furthermore, Merck is looking to price the treatment so it will be affordable for 105 developing countries.

Yet, it is not all about COVID-19. As mentioned, the company is driving revenues with the cancer treatment segment. This position might get stronger as they've entered into a clinical trial collaboration with Gilead Sciences (NasdaqGS: GILD). The latter will sponsor a global Phase 3 trial to evaluate triple-negative breast cancer (TNBC) treatment.

Outlining Total Returns

One flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.

Over half a decade, Merck managed to grow its earnings per share at 5.9% a year. This EPS growth is lower than the 8% average annual increase in the share price. This suggests that market participants hold the company in higher regard these days. And that's hardly shocking given the track record of growth.

Below, you can see how EPS has changed over time (discover the exact values by clicking on the image).

earnings-per-share-growth
NYSE: MRK Earnings Per Share Growth October 29, 2021

It is, of course, excellent to see how Merck has grown profits over the years, but the future is more important for shareholders. You can see how its balance sheet has strengthened (or weakened) over time in this free interactive graphic.

What About Dividends?

It is important to consider the total shareholder return and the share price return for any given stock. The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of Merck, it has a TSR of 81% for the last 5 years. That exceeds its share price return that we previously mentioned. The dividends paid by the company have thusly boosted the total shareholder return.

Managing Expectations

Merck shareholders are up 24% for the year (even including dividends). Unfortunately, this falls short of the market return. On the bright side, that's still a gain, and it's better than the average return of 13% over half a decade. This could indicate that the company is winning over new investors as it pursues its strategy.

According to some estimates, molnupiravir costs US$17.74 to produce, but the company charges the U.S. government US$712 - obviously extremely profitable. While the stock is almost at the new all-time highs, anyone can guess how much is already priced in.

To understand Merck better, we need to consider many other factors. Even so, be aware that Merck is showing 4 warning signs in our investment analysis, you should know about...

Of course, Merck may not be the best stock to buy. So you may wish to see this free collection of growth stocks.

Please note, the market returns quoted in this article reflect the market-weighted average returns of stocks that currently trade on U.S. exchanges.

What are the risks and opportunities for Merck?

Merck & Co., Inc. operates as a healthcare company worldwide.

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Rewards

  • Trading at 46.7% below our estimate of its fair value

  • Earnings are forecast to grow 11.85% per year

  • Earnings grew by 159.3% over the past year

Risks

  • Significant insider selling over the past 3 months

  • Has a high level of debt

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Share Price

Market Cap

1Y Return

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Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article 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.

Stjepan Kalinic

Stjepan Kalinic

Stjepan is a writer and an analyst covering equity markets. As a former multi-asset analyst, he prefers to look beyond the surface and uncover ideas that might not be on retail investors' radar. You can find his research all over the internet, including Simply Wall St News, Yahoo Finance, Benzinga, Vincent, and Barron's.

About NYSE:MRK

Merck

Merck & Co., Inc. operates as a healthcare company worldwide.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation4
Future Growth2
Past Performance6
Financial Health4
Dividends5

Read more about these checks in the individual report sections or in our analysis model.

Outstanding track record established dividend payer.