{"id":33207,"date":"2023-07-09T00:22:12","date_gmt":"2023-07-09T04:22:12","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/merck-the-market-lacks-conviction-to-take-it-higher-nysemrk\/"},"modified":"2023-07-09T00:22:14","modified_gmt":"2023-07-09T04:22:14","slug":"merck-the-market-lacks-conviction-to-take-it-higher-nysemrk","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=33207","title":{"rendered":"Merck: The Market Lacks Conviction To Take It Higher (NYSE:MRK)"},"content":{"rendered":"
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Investors of Biopharma leader Merck & Co., Inc. (NYSE:MRK<\/span>) didn’t cheer the completion of its recent $10.8B acquisition of Prometheus Biosciences, which I first discussed in April. MRK has remained close to the lows in June, as its premium valuation needs to be carefully assessed.<\/span><\/p>\n

The company expects to provide a more detailed outlook at its upcoming Q2 earnings release on August 1, discussing the near-term impact on its earnings drivers. According to the company’s prelim update, the acquisition is “expected to negatively impact earnings per share by approximately $0.25 in the first 12 months following the transaction’s close.”<\/p>\n

As such, I believe the impact is likely not that significant, as Merck is expected to report an adjusted EPS of $7 based on the revised consensus estimates. Although it represents a 6.5% decline YoY, it’s not likely to be structural to Merck’s earnings growth. Accordingly, Merck’s adjusted EPS is projected to return to positive growth in FY24 with a 21.8% increase.<\/span><\/p>\n

With Merck not facing an impending patent cliff on its well-diversified portfolio, Merck Bulls could argue that it justifies MRK’s premium valuation. Moreover, with Merck’s robust balance sheet boasting a net debt\/forward EBITDA ratio of just 0.32x for FY23, the company has significant flexibility to capitalize on business development opportunities to expand its pipeline.<\/p>\n

While Merck’s wide-moat business model is underpinned by its success in Keytruda, it also has a robust vaccines portfolio bolstering its competitive edge. With its industry-leading production scale, Merck is expected to continue delivering robust profitability and operating leverage.<\/p>\n

\"MRK<\/span>
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MRK forward EBITDA multiples trend (koyfin)<\/span><\/p>\n<\/figcaption><\/figure>\n

However, it’s also critical to consider whether the current valuation in MRK justifies the growth inflection that analysts anticipate next year. I assessed that while the company promulgated a negative impact on this year’s earnings due to its recent acquisition, investors weren’t unduly concerned.<\/p>\n

Despite that, MRK last traded at a forward EBITDA multiple of nearly 12x, well above its 10Y average of 10.6x. On an adjusted P\/E basis, MRK’s forward adjusted P\/E of 15.8x is also well above its Pharma peers’ median of 11.5x (according to S&P Cap IQ data), suggesting no valuation dislocation despite the recent pullback.<\/p>\n

Hence, I assessed that unless you have high-conviction in MRK’s thesis, I don’t view the current opportunity as particularly enticing from a risk\/reward perspective.<\/p>\n

\"MRK<\/span>
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MRK price chart (weekly) (TradingView)<\/span><\/p>\n<\/figcaption><\/figure>\n

MRK’s price action suggests that the recent pullback is close to re-testing its June lows. However, the critical support zone to watch remains MRK’s $100 level, bolstered by dip buyers in January and March.<\/p>\n

I see MRK’s May highs particularly troubling, indicating that holders weren’t willing to support a decisive breakout into higher levels, as MRK took out its all-time highs. As such, the lack of decisive breakout buying momentum indicates that perhaps the market was concerned about MRK’s relatively expensive valuation.<\/p>\n

With that in mind, I urge investors to consider holding back adding more positions at the current levels, considering its relatively well-balanced risk\/reward, without convincing technical buy triggers.<\/p>\n

However, if MRK could retrace further toward the $100 region and hold its support zone robustly, it could open up another opportunity for dip buyers to add with more confidence considering an improved risk\/reward profile.<\/p>\n

Rating: Maintain Hold.<\/em><\/p>\n

Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry\/exit at the point of writing unless otherwise specified.<\/em><\/p>\n

We Want To Hear From You<\/h2>\n

Have additional commentary to improve our thesis? Spotted a critical gap in our thesis? Saw something important that we didn\u2019t? Agree or disagree? Comment below and let us know why, and help everyone in the community to learn better!<\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Investors of Biopharma leader Merck & Co., Inc. (NYSE:MRK) didn’t cheer the completion of its recent $10.8B acquisition of Prometheus Biosciences, which I first discussed in April. MRK has remained close to the lows in June, as its premium valuation needs to be carefully assessed. The company expects to provide a more detailed outlook at […]<\/p>\n","protected":false},"author":1,"featured_media":33208,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"gallery","meta":{"footnotes":""},"categories":[236],"tags":[83],"class_list":["post-33207","post","type-post","status-publish","format-gallery","has-post-thumbnail","hentry","category-news","tag-featured","post_format-post-format-gallery"],"yoast_head":"\nMerck: The Market Lacks Conviction To Take It Higher (NYSE:MRK) | iFintechWorld<\/title>\n<meta name=\"description\" content=\"Investors of Biopharma leader Merck & Co., Inc. 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