Why You Should Buy Merck (MRK) Stock While It’s Still at a Discount

Today, we’ll be taking a look at $245.75 billion market cap pharma giant Merck & Co (NYSE: MRK). At the moment, I believe it could represent a fantastic addition to a long-term, buy-and-hold portfolio.

In terms of execution, Merck has been on a roll for a while now — with the business either meeting or exceeding analyst estimates for the past 18 quarters consecutively.

However, in spite of that, short-term to mid-term performance hasn’t reflected the company’s enviable execution. MRK shares are in the green for just 0.53% on a year-to-date (YTD) basis, although it should be noted that they have rallied by 21.87% in the last 6 months.

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Here’s how we’re going to approach today’s stock pick — first, we’ll take a look at the salient metrics, and then we’ll take a look at recent developments and catalysts. Put together, the two should provide a clear enough picture.

Here’s exactly why MRK is a Strong Buy right now…

Our quant rating system, which uses 115 unique factors to grade equities, puts MRK in the top 3% of the more than 4,600 stocks that it tracks. This gives it a Zen Rating of A — and stocks with that distinction have provided an average annual return of 32.52% since the turn of the millennium.

That’s great, but as a lone datapoint, it doesn’t give you the full picture. Each Zen Rating is a composite and is made up of 7 Component Grade ratings. By taking a look at those, we can get a better feel for what exactly Merck’s strengths are.

I sort of spoiled the main selling point with the title, but we’ll get to that in a minute. First things first — this is a healthy, consistent business. Merck’s margins are improving, and the company has steadily been paying down debt. In terms of its Financials Component Grade rating, the stock ranks in the 95th percentile of equities — equal to or better than 95% of stocks, or, in other words, in the top 5%.

On top of that, MRK is in the top 4% according to our Safety rating, which measures the stability and predictability of revenue inflows, stock price stability, and how predictable a company’s earnings are. At the moment, Merck’s beta sits at a lowly 0.29.

It also stacks up well against rivals and peers. MRK is a part of the General Drug Manufacturer industry, which has an Industry Rating of A. This is currently the 4th highest-rated industry, and it consists of 20 stocks. Merck is the 5th highest-rated stock in the industry, as well as the 6th largest by market cap.

Merck is no slouch when it comes to Growth, either — in this category, it ranks in the top 24% of equities. However, the single most impressive thing about the stock is its valuation. The average stock is trading at a price-to-earnings (P/E) ratio of 45.84x. The average Drug Manufacturer stock is trading at a P/E of 44.53x. MRK, however, is currently trading at a P/E of just 13.08x, so it’s incredibly undervalued. This puts it in the top 1% for Value.

Okay — those were the metrics. Now, let’s turn to recent developments and catalysts.

The first thing you should know is that Merck will face one of the industry’s largest patent cliffs in history relatively soon. Key word being relatively — Keytruda, the company’s best-selling product, which accounts for more than 50% of Merck’s pharmaceutical sales, is expected to see a loss of exclusivity in 2028.

Now, that won’t dry up this particular revenue stream completely — but it will diminish it significantly. Thankfully, this was a factor that was known and understood well ahead of time — so the business has been preparing for it. 

On one side, the business has implemented a $3 billion cost-saving restructuring plan, and on the other, Merck has tripled its phase 3 pipeline since 2021, having funneled plenty of that Keytruda revenue into both in-house development and an aggressive mergers & acquisitions (M&A) strategy. Merck is expected to launch somewhere in the ballpark of 20 vaccines & drugs in the next couple of years.

To boot, recent developments seem quite positive. Last week, one of the company’s parasite treatments for cattle received conditional approval from the FDA. Winrevair, one of the company’s up-and-coming products, recently showed positive results in a phase 2 trial, and has been recognized by both the FDA and European regulatory bodies as a viable treatment for a rare pulmonary disease.

Lastly, Merck also acquired Cidara Therapeutics for $9.2 billion back in November — thereby also acquiring a very promising, non-vaccine flu prevention drug candidate which is currently in phase 3 trials.

Okay, I lied — the last thing I want to mention is that the key revenue driver here, Keytruda, is administered intravenously. Merck has shifted its focus to a subcutaneous version — and that one, which looks to be much more convenient, will benefit from new patent protections. Does this eliminate the patent cliff? No — but it does go a long way in lessening its effects.

Management seems quite confident that the best is yet to come — 84.63% of the insider transactions tied to the stock in the past 12 months have been purchases.

Finally, we have a pretty nice 4% forward dividend yield, with a very reasonable and sustainable 42.8% payout ratio — so there’s something for income investors here as well.

At its current price, I find it hard to argue against MRK. The execution is solid, and has been for a while, the balance sheet is strong, and the business seems to be making all the right moves.

With everything said and done, we have an extremely cheap industry leader with a strong balance sheet, which seems to be making all the right moves. Merck shares have been above their 50-day and 200-day simple moving averages (SMAs) since November — it seems there’s quite a bit of bullish momentum, so I wouldn’t wait for a better entry if I were you.

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