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Should You Buy Merck Stock? 3 Pros, 3 Cons (MRK)

Both sides of the table have strong arguments, but one side's is better than the other

This year hasn’t been a particularly good one for Merck (MRK) shareholders. The Merck stock price is currently about 16% below its early January peak level, and MRK shares are still in a downtrend.

Should You Buy Merck Stock? 3 Pros, 3 Cons (MRK)Yes, as yours truly pointed out on Monday, Merck stock is an overall buy among the big pharma names. That doesn’t mean MRK is infallible though; there are no absolutes in the world of investing.

With that as the backdrop, here’s a closer look at the key things working in Merck’s favor, and the three biggest headwinds that could end up being trouble for the Merck stock price.

Merck Stock Pros

Value: If the word had only been used once recently, it might not even be worth mentioning. But, to hear the word “value” used to describe MRK more than once of late — as in Merck stock has plenty of it at its depressed price — there’s probably something to it. Barclays analyst Geoff Meacham chimed in most recently on the premise, explaining that any headwind Remicade and Januvia may face in the future has already been priced in. Meacham also likes Merck’s pipeline, adding “Even if pipeline assets aren’t blockbusters, they add up and are nearly free at the current valuation.”

Dividend: One of the benefits of the falling Merck stock price is the subsequent increase in its dividend yield. As of the latest calculation, MRK sports a yield of 3.4%, and the pharma company just raised its payout (again) by a penny per quarter. And make no mistake … that payout is reliable. Though it has seen periods of stagnation, it has not gone down at any point in modern history, and it usually increases every year.

Pipeline: It’s a misnomer to think Merck doesn’t have much of a pipeline, and is at extreme risk of losing ground should the aforementioned Remicade and Januvia stumble. Case in point No. 1: Keytruda. The world’s first anti-PD1 therapy has already been approved as a therapy for melanoma and non-small cell lung cancer, but the drug is currently being tested as a treatment for more than 30 types of tumors. Case in point No. 2: Elbasvir and grazoprevir. In early November, Merck presented data suggesting that that drug combo effectively cured hepatitis C, which could take dead aim at far more expensive treatment options currently available, giving Merck a crack at the huge HCV market.

Merck Stock Cons

Potential Political/Public Backlash: It didn’t seem to do any major damage to MRK at the time, but if the mentality Merck CEO Ken Frazier exposed back on Oct 30 is any indication of how he’s thinking, the bears may get another chance to beat up on Merck stock. The gaffe? Frazier justified the six-figure price tag for a Keytruda treatment in that it was on par with that Yervoy, from Bristol-Myers Squibb (BMY), adding “You’re getting much better efficacy, much better tolerability for the same price.” He’s not wrong, but he’s ignoring the fact that either treatment is unaffordable for self-payers, and increasingly tougher for insurers to pay (who pass the cost along to consumers). More disconnected comments like that could alienate the public.

Falling Revenue: Congratulations are in order for Merck’s Keytruda and elbasvir/grazoprevir combo as a therapy for hepatitis C. As impressive as those drugs are, however, they’re not growing fast enough to offset waning sales. The top line actually fell last quarter, not to mention fell short of estimates. That didn’t prevent the market from cheering the earnings beat, nor did it prevent the company from raising its full-year guidance. Another revenue shortfall, though, and investors may not be so forgiving the next time around — even if the strong U.S. dollar is to blame again.

Largely Missed the Tax-Inversion/Acquisition Boat: Unlike key rival Pfizer (PFE), Merck was never interested in foreign acquisitions as a means save on taxes; it has been barely interested in major deals, seeking small “bolt on” acquisitions instead. While the adherence to fiscal discipline and focus on the task at hand is impressive, Merck may have been penny-wise and pound-foolish. Now most of the best potential big partners have teamed up with someone else, and tax inversions could soon be quelled by an overhaul of the U.S. corporate tax code. Without that benefit, other pharma stocks could outshine MRK.

Bottom Line for MRK

While the downsides are clear, the upsides are more potent — Merck stock just has too much going for it at this time to put it on a shelf.

This year’s pullback looks as if it’s nearing an end, and the beginning of a new year should coincide with new life for MRK shares.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/12/buy-merck-stock-3-pros-3-cons-mrk/.

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