Choose a Merck stock or its peer – both can offer similar returns

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We believe pharmaceutical giants Merck stock (NYSE: MRK) and Pfizer stock (NYSE: PFE) is likely to deliver similar returns over the next three years. While Merck is trading at a relatively higher valuation of 4.9x trailing earnings versus 2.9x for Pfizer
PFE
this valuation gap can be attributed to Merck’s lower financial risk, as discussed below.

Looking at stock returns, Merck’s 37% growth over the past 12 months is much better than the 16% decline for Pfizer and -16% for the broader S&P 500 index. There’s more to the equation, and in the sections below we discuss the potential equity returns for MRK and PFE over the next three years. We compare a whole range of factors, such as historical revenue growth, returns and valuation, in an interactive dashboard analysis from Merck versus Pfizer: Which stock is a better bet? Parts of the analysis are summarized below.

1. Pfizer’s revenue growth is better

  • Both companies posted strong double-digit sales growth over the past twelve months. Still, Pfizer’s sales growth at 44.5% is higher than Merck’s at 27.8%.
  • However, looking at a longer time frame, Pfizer saw its sales grow at an average annual rate of 32.2% to $81.3 billion in 2021, compared to $40.8 billion in 2018, while Merck saw its sales grow at an average growth rate of 5.3 billion. % to $48.7 billion in 2021 versus $42.3 billion in 2018.
  • Pfizer’s revenue in recent years has been primarily driven by very high demand for the Covid-19 vaccine. However, the demand for Covid-19 vaccines is also decreasing with an increase in global vaccination coverage. This is likely to weigh on Pfizer’s revenue growth for years to come.
  • Merck has benefited in recent years from Keytruda’s label expansion and strong demand for vaccines, primarily Gardasil. Both products are experiencing strong demand, with sales up 23% yoy to $15.5 billion for Keytruda and up 31% to $5.4 billion for Gardasil for the nine months ending September 2022. Both are expected to drive sales growth for Continue to boost Merck .
  • Us Pfizer Sales Comparison and Merck Earnings Comparison dashboards provide more insight into the turnover of the companies.
  • Looking ahead, the revenues of both companies are expected to grow at a similar rate over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 1.6% for both Pfizer and Merck, based on Trefis Machine Learning analysis.
  • Please note that we have different methodologies for companies negatively impacted by Covid and those not or positively impacted by Covid as we forecast future earnings. For businesses negatively impacted by Covid, we factor in the quarterly revenue recovery trajectory to predict recovery to pre-Covid revenue percentage. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies that show positive sales growth during Covid, we consider annual average growth pre-Covid with a certain weighting for growth during Covid and the last 12 months.

2. Pfizer is more profitable, but higher risk

  • Merck’s operating margin of 30.7% over the past twelve months is slightly lower than Pfizer’s 33.6%.
  • This compares to 36.2% and 18.7% respectively in 2019, before the pandemic.
  • Merck’s free cash flow margin of 33.5% is slightly better than Pfizer’s 26.6%.
  • Us Pfizer Operating Income Comparison and Merck Operating Income Comparison dashboards have more details.
  • In terms of financial risk, Merck is better placed. The 10.8% debt as a percentage of equity is slightly lower than 13.8% for Pfizer, while the 11.4% cash as a percentage of assets is higher than 0.7% for the latter, implying that Merck has a better debt position and more cash buffer.

3. The network of everything

  • We see that Pfizer has shown better revenue growth, is more profitable and is available at a relatively lower valuation. On the other hand, Merck has a better debt position and more cash buffer, which entails lower financial risk.
  • Looking at the outlook now, on a P/S basis, due to large swings in P/E and P/EBIT, we think both Merck and Pfizer are likely to offer similar returns over the next three years.
  • The table below summarizes our revenue and return expectations for Merck and Pfizer over the next three years and points to an expected return of 9% for Merck during this period vs 13% expected return for Pfizer stock, implying that investors can choose either of the two for a similar return, based on Trefis Machine Learning analysis – Merck versus Pfizer— which also gives more details on how we arrive at these numbers.

While MRK and PFE may offer similar returns, it’s helpful to see how Merck’s colleagues rate on metrics that matter. Other valuable comparisons for companies in different industries can be found at Peer comparisons.

In addition, the Covid-19 crisis has led to many price discontinuities which can provide attractive trading opportunities. For example, you’d be surprised how counterintuitive stock valuation is Xylem versus Merck.

Despite rising inflation and rate hikes by the Fed, Merck shares are up 37% over the past 12 months. But can it fall from here? See how low Merck shares can go by comparing the drop from previous market crashes. Here’s a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Us high-quality wallet and multi-strategy portfolio have consistently beaten the market since the end of 2016.

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