Why Merck Is A Core Portfolio Holding

Merck (MRK) - 12/17/2019
Stock Price: $89.02
Market Cap: $227B
Forward P/E: 15.89
Dividend Yield: 2.74%
TSC Core Equity Portfolio Weight: 4%
Price Target(s): $128, $194, and $298 (+44% - 234% upside potential)

  • Merck’s blockbuster cancer drug Keytruda has a long runway ahead of it, and in a few years time will be the best selling drug franchise of all time. The drug has first mover advantage in first line non-small cell lung cancer, and is consistently expanding into new cancer indications. Keytruda has the potential to become a standard of care for cancer patients, akin to chemo but without the awful side effects. 
  • Merck’s revenue growth is accelerating, most recently hitting 10% yoy growth, and EPS growth is even higher, yet the stock is only trading at a forward P/E of 15.9x, a 10% discount to the S&P 500's forward P/E of 17.8x. The valuation looks compelling as Keytruda expands its dominance in the immuno-oncology field.
  • Other bright spots of Merck’s portfolio are the HPV vaccine Gardasil, which has seen sustained growth as more parents accept the science over the uncomfortable conversation of sex w/ their kid and/or doctor, and as Gardasil expands its patient population from teens, to young adults, to now adults. Merck's vaccine platform has been an impressive anchor for decades.
  • A strong balance sheet, a stable and growing dividend, and optionality associated with Merck’s pipeline and recent acquisitions (Arqule); help round out the bull case for this healthcare giant.

  • Shares of Merck have yet to eclipse its high made during the 2000 dot-com era. In other words, the stock has gone nowhere, consolidating sideways for nearly two decades (I like that). And now, the stock is on the verge of breaking out of its all time high. The upside from a historic breakout above $91.50 will be meaningful.
  • The first price target of $128 (+44% upside) is derived from the 161.8% Fibonacci extension level of the 2000 high and the 2009 low. The second price target of $194 (+117% upside) is the 261.8% extension level. The last price target of $298 (+234% upside) is the 423.6% extension level.
Key Risks
  • Advancements in oncology can happen quickly, which could cause disruption to Merck's leading growth franchise, Keytruda. 
  • Going into the 2020 election cycle, expect a ton of headline risk surrounding health care and drug prices. Probability of anything getting done is slim, even if a progressive democrat wins the white house, so any volatility caused by political headlines should be viewed as a buying opportunity.


Popular Posts