MRK Stock Study (3-14-23)

I recently did a stock study on Merck & Co., Inc. (MRK) with a closing price of $105.00.

Value Line writes:

     > Merck & Co., Inc. is a global health care company that delivers
     > innovative health solutions through its prescription medicines,
     > vaccines, biologic therapies, and animal health products.
     > Operations comprised of two segments: Pharmaceutical (88% of
     > total sales) and Animal Health (12%). Top-grossing franchises
     > in 2021 included Keytruda (oncology), Januvia (diabetes),
     > Gardasil (vaccine), ProQuad (vaccine), and Bridion (hospital
     > acute care). Acquired Acceleron Pharma (11/21).

This mega-sized (annual revenue > $50B) company has grown sales and earnings at rates of 3.2% and 13.1% per year, respectively, over the last 10 years. I hesitate to call MRK a “high-quality growth stock” because lines are not particularly up, straight, and parallel. YOY sales were down in ’14 and ’15. YOY EPS were down in ’15, ’16, ’17 (perhaps due to TCJA), and ’20.

Excluding an upside outlier in ’14 (40.9%), PTPM has increased over the last decade from 12.6% (’13) to 27.7% (’22) with a last-5-year average of 23.9%. This trails peer and industry averages.

Over the last decade, ROE has increased from 9.1% to 32.6% with a last-5-year average of 29.1%. This is lower than peer and industry averages. Debt-to-Capital has increased from 33.5% (’13) to 55.7% (’20) before declining to 40% (’22) with a last-5-year average of 48.2%: slightly less than peer and industry averages. Interest Coverage is 18 and Quick Ratio is 0.93. Value Line rates the company A for Financial Strength and M* describes the balance sheet as “sound” while assigning a Standard rating for Capital Allocation.

I forecast long-term annualized sales growth of 3% based on the following:

• CNN Business projects a 2% YOY contraction and 1.9% growth per year for ’23 and ’22-’24, respectively (based on 23 analysts).
• YF projects YOY 1.8% contraction and 6.2% growth for ’23 and ’24, respectively (19 analysts).
• Zacks projects YOY 1.3% contraction and 6.8% growth for ’23 and ’24, respectively (6).
• Value Line projects 4.6% annualized growth from ’21-’26.
• CFRA projects a 1.2% YOY contraction and 5% growth per year for ’23 and ’22-’24, respectively (6).
• M* gives a 2-year ACE of 1.9% growth per year while also projecting 6% per year x5 years in its analyst report.

I am forecasting below the two longer-term estimates.

I forecast long-term annualized EPS growth of 7% based on the following:

• CNN Business projects a 7.8% YOY contraction and 7% growth per year for ’23 and ’22-’24, respectively (based on 23 analysts) along with a 5-year annualized growth rate of 11.5%.
• MarketWatch projects annualized growth of 7.7% and 8.8% for ’22-’24 and ’22-’25, respectively (23 analysts).
• Nasdaq.com projects annualized growth of 18.6% and 14.9% for ’23-’25 and ’23-’26, respectively (10, 5, and 3 analysts for ’23, ’25, and ’26).
• Seeking Alpha projects 4-year annualized growth of 9.8%.
• YF projects YOY 8% contraction and 25% growth for ’23 and ’24, respectively (19), along with 5-year annualized growth of 10.5%.
• Zacks projects YOY 8% contraction and 25% growth for ’23 and ’24, respectively (8), along with 5-year annualized growth of 8%.
• Value Line projects annualized growth of 8.4% from ’21-’26.
• CFRA projects a 7.4% YOY contraction and 9.3% growth per year for ’23 and ’22-’24, respectively, along with a 3-year CAGR of 9%.
• M* projects an annualized long-term growth rate of 7.3%.

I am projecting just below the entire range (mean of six long-term estimates: 9.3%).

My Forecast High P/E is 18. Excluding the upside outlier in ’17 (73.2), high P/E has ranged from 14.6 (’14) to 44.3 (’16) with a last-5-year average of 25.3. I am forecasting toward the bottom of the range (only the ’14 value is lower).

My Forecast Low P/E is 13. Excluding the upside outlier in ’17 (58.8), low P/E has ranged from 11.6 (’14) to 32.4 (’16) with a last-5-year average of 17.8. I am forecasting toward the bottom of the range (only the ’14 value is lower).

My Low Stock Price Forecast is the default value of $74.20. This is 29.3% less than the previous closing price, 4% less than the 52-week low of $77.3, and 1.8% higher than the ’22 low.

Payout Ratio in the last 10 years has ranged from 42.5% in ’14 to 131.2% in ’16 (excluding upside outlier of 217.2% in ’17) with a last-5-year average of 67.5%. I am estimating conservatively at 40%.

These inputs land MRK in the HOLD zone with an U/D ratio of 1.2. The Total Annualized Return (TAR) is 8.6%.

TAR is decent for a large-sized company, but PAR (using Forecast Average, not High, P/E) is only 5.8%. A good margin of safety (MOS) will give me more confidence in the former as a reasonable target.

For this assessment, I compare my forecasts with those of Member Sentiment (MS). Out of 399 studies over the past 90 days (my own excluded), projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio average 5.7%, 8.4%, 25.7, 22.1, and 96.3%, respectively. I am lower across the board [I think something is seriously awry with the 96.3% but that would be a whole other discussion] thereby suggesting a robust MOS in this study.

Value Line projects an average annual P/E of 14, which is much lower than MS (23.9) and even lower than mine (15.5). Upon closer look, though, some discrepancy exists between M* and Value Line’s P/E ratios. Looking at M*’s mean high/low P/E versus Value Line’s average annual P/E (statistical array), for ’18-’22 reveals the following: 27.4 vs. 14.8, 20.6 vs. 15.9, 27 vs. 13.6, and 17.0 vs. 12.9. In other words, the mean difference over these four years is 8.7 points in favor of M*. Since I used M* data to determine my forecasts, maybe I should compare my 15.5 with 14 + 8.7 = 22.7 for Value Line as an apples-to-apples comparison. Not only does this preserve my MOS, it would seem to exaggerate it!

In either case, MRK seems to be fully-valued right now. I would look to re-evaluate below $91/share.