Merck (NYSE:MRK) is truly a great pharmaceutical company, but MRK stock has already moved up over 24% from its recent lows this year. Moreover, the stock is very close to its average dividend yield and target price — based on its average price-earnings ratio. That’s why investors should stay clear until shares pull back.
Don’t get me wrong. I still think Merck is a very worthwhile company. It has a large $191 billion market value, a reasonable dividend yield and a good P/E ratio.
For example, the dividend yield is 3% at today’s price and it has a forward P/E ratio of just 14.6 times, according to Seeking Alpha. These are relatively cheap investment ratios for such a large drug company.
Investors should definitely consider buying this stock at some point in their investing career. But just not right now. The valuation for MRK stock seems pretty full to me.
What’s Behind Merck’s Recent Rise?
President Donald Trump’s administration recently selected five companies, including Merck, under its Operation Warp Speed initiative. The goal is to get a vaccine up and running by the end of January 2021. The government plans to help fund novel coronavirus vaccine efforts with these five companies.
Although Merck has not yet announced any clinical trials, its efforts should be enhanced with this program. It is using the same platform that was used to make its successful Ebola vaccine.
It is also pushing a second vaccine effort using a measles vaccine platform, along with a Vienna-based company called Themis Biosciences. In fact, Merck recently acquired Themis Biosciences.
Merck plans on spinning off a new company called Organon during the first half of 2021. Merck said at its annual meeting on May 26 that having “2 more focused companies will allow us to reach more patients, drive stronger growth, and unlock long-term value for shareholders.”
Analysts expect earnings this year of up to $5.32 per share, up from normalized EPS of $3.53 in 2019. Moreover, the earnings forecast for 2021 is for EPS of $6.03.
Target Values for MRK Stock
Merck’s historical dividend yield over the past four years has been 2.98%. But today’s dividend is 2.97%. So MRK stock is exactly at its historical yield today. There is little upside based on this valuation measure.
Moreover, over the past nine years, Merck’s average annual P/E ratio has been 14.8 times earnings. Using this measure, we can project a slightly higher target price for MRK stock.
For example, using the $6.03 2021 EPS estimate and multiplying this by 14.8 produces a target price of $89.24 per share. Before the most recent selloff, MRK stock was trading near $81. Using that price, the target is just 10% higher.
That is not much to talk about. It shows that the stock represents full value. So unless the spinoff of Organon brings in a surprise earnings forecast, the upside opportunity is limited. There is little margin of safety here for most investors.
What Should You Do With Merck?
Analysts are generally very positive on Merck. Barron’s recently pointed out that over two-thirds of Merck’s revenues come from drugs administered in doctor’s offices.
In other words, the ability of doctors to use its products is high. In addition, its cancer drug Keytruda has over 20 studies for its use in different cancers.
So watch MRK stock and look for an opportunity to buy it on any kind of new pullback. You will likely be rewarded over the long term.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.
