Merck & Co., Inc. (NYSE:MRK) stock saw a tepid reaction as the company released earnings earlier in the morning. Wall Street expressed mixed reviews as the company beat estimates on earnings but disappointed on revenue growth.
Like many of its drug trials, the quarterly report for MRK stock reported both successes and setbacks. However, even with the turmoil, MRK continues to position itself for the slow, steady growth its investors tend to expect.
MRK Beat on Earnings, Missed on Revenue
Earnings per share (EPS) for Q1 came in at $1.05. This beat estimates by 5 cents and came in well ahead of last year’s Q1 EPS of 88 cents. However, revenue of $10.04 billion missed Wall Street projections by $60 million. The company saw 6.5% year-over-year growth for the quarter.
MRK also updated revenue and earnings guidance for 2018. The company now expects to bring in between $41.8 billion-$43 billion for the year, up from the previous $41.2 billion-$42.7 billion estimate from last quarter. This should yield non-GAAP profits of $4.16-$4.28 per share. Previous guidance had fallen in the range of $4.08-$4.23 per share.
Chairman and CEO Kenneth Frazier credited the growth with robust sales of Keytruda, Gardasil, Bridion, Nuvaring, and Simponi. Of these drugs, its oncology drug Keytruda now leads in sales. Sales for Keytruda grew by 151% over the last year, making it the highest-grossing drug for Merck.
Drug Trials During the Quarter Also Offered Mixed News
The worst news for the quarter was likely the decision to stop trials on MK-8931, Merck’s experimental Alzheimer’s drug. This is critical for the company. Since patent protections expire, companies must always have new drugs in the pipeline to drive future revenue.
Losing the anti-Alzheimer’s drug presented a huge setback from that standpoint. For now, much of its current phase 3 pipeline focuses on derivatives of Keytruda. However, drugs that have shown progress against HIV and pneumococcal disease have shown similar promise at this stage.
Valuations, Dividends Remain Favorable for MRK Stock
MRK stock fell by about 12% following the stoppage of MK-8931 trials. Fortunately, it has recovered most of the loss. This behavior speaks to the nature of the equity. MRK, like most Dow 30 stocks, stands as an equity that will deliver slow but steady profitability.
The stock currently trades at a price-to-earnings (PE) ratio of just over 15. However, earnings growth for the next three years will come in at an annual rate in the mid to high-single-digits. This growth rate will keep it comparable to peers such as Pfizer Inc. (NYSE:PFE), Eli Lilly And Co (NYSE:LLY), and GlaxoSmithKline plc (ADR) (NYSE:GSK).
Moreover, its dividend yield stands at about 3.25%, which comes in much higher than the S&P 500 average. The dividend has risen over time, and it has been raised every year since 2011. Since that initial 2011 dividend increase, the company has hiked the payout by 1 cent per share per quarter every year.
It remains unclear if MRK stock seeks dividend aristocrat status (meaning annual dividend increases for 25 or more years). However, all signs indicate the increases can continue for the foreseeable future.
Concluding Thoughts on MRK Stock
The latest earnings reports show that Merck stock continues on its slow, steady path for growth. Wall Street expressed a lukewarm reaction as MRK beat on earnings but missed on revenue estimates. However, the earnings report seems to characterize the year.
The company, despite showing a promising drug pipeline, saw disappointment as its Alzheimer’s drug did not make it through testing.
Despite this setback, I do not think much has changed with Merck stock. MRK continues to deliver gradual but solid profit increases, and its long-term investors still see annual dividend increases. The company’s drug pipeline remains somewhat uncertain. However, for investors who like slow, steady, low-risk growth, the profit pipeline on MRK stock looks solid for as far as the eye can see.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.