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This article is an excerpt from Barron’s 10 favorite stocks for 2021. To see the full list, click here.
Major drug stocks have rarely been so inexpensive relative to the S&P 500 in the past 15 years, and Merck is a prime example.
Shares of the pharmaceutical giant (ticker: MRK) are down 12% this year to $80. They trade for 13 times projected 2021 earnings of $6.29 a share, against a market multiple of about 23. Merck has a secure 3.3% dividend yield, double that of the S&P 500.
Merck was slow in developing a Covid-19 vaccine—it is months behind Pfizer (PFE) and Moderna (MNRA)—but it has one of the industry’s best overall vaccine franchises, led by Gardasil for cervical cancer. That franchise could be worth half of its current market value of about $200 billion.
Merck / MRK
E=Estimate
Source: Bloomberg
Analysts see high-single digit earnings growth in the coming years, adjusted for the pending 2021 spinoff of a unit that will be called Organon, which will include the slower-growth women’s health business and off-patent drugs. One of the more promising drugs in Merck’s pipeline is an oral antiviral for Covid-19.
The company’s top drug is Keytruda, which harnesses the immune system to fight lung cancer and other malignancies. It may generate over $14 billion in sales this year—30% of Merck’s total revenue. Keytruda’s patent expires in 2028, but Merck has plenty of time to deal with that.
J.P. Morgan analyst Chris Schott, who has an Overweight rating and a $105 price target on Merck, sees an “attractive upside case for the stock” based on margin improvement, 7% annualized revenue growth through 2025, and potential acquisitions enabled by the pharmaceutical maker’s strong balance sheet.
Write to Andrew Bary at [email protected]
