22Q4 sales rose 2.2% to $13.8 billion, as a 19.6% gain in KEYTRUDA was mostly offset by declines in Gardasil, Lagevrio and Januvia/Janumet, among others. GAAP diluted EPS declined 21.3% to $1.19 and non-GAAP diluted EPS declined 15.0% to $1.53. The decline was due mostly to a 23% jump in R&D expense, which more than offset improvements in gross margin and the SG&A expense ratio. Management said that the increase in operating costs was due to increased investment to support its portfolio and pipeline. Merck’s revenues were 2.1% above my estimate; its GAAP EPS was $0.01 better; and non-GAAP EPS exceeded my $1.47 estimate by $0.15 and also beat consensus by $0.08.
Despite the stronger than projected 22Q4 results, management’s 2023 guidance was below expectations. Its revenue growth guidance of $57.2-$58.7 billion was below my forecast of $62.8 billion and even below 2022’s $59.3 billion. Its GAAP EPS guidance of $5.86-$6.01 was below my previous forecast of $6.37. Its non-GAAP EPS guidance of $6.80-$6.95 was below my expectations of $7.63. I have adjusted my forecast to be generally within the midpoint of Merck’s 2023 guidance, with projected revenues of $57.4 billion, GAAP EPS of $5.91 and non-GAAP EPS of $6.86. My projections for 2024 are now set at $60.7 billion of revenues, up 5.6%; GAAP EPS of $6.68, up 13.0%; and non-GAAP EPS of $7.58, up 10.5%
Despite the disappointing guidance, the stock has performed well. Since my last report, MRK has delivered a 9.2% total return, better than the 5.4% of the peer group (as represented by DRG), but behind the S&P 500’s 11.3% advance. With this gain, its 2023 non-GAAP P/E multiple of 15.5 is well above the peer group average of 14.0. Similarly, its 2024 non-GAAP P/E of 14.0 is above peers’ 12.6. (However, my 2024 non-GAAP EPS forecast is well below the average estimate of analysts.)
Based upon 2023 guidance and my projections, I am maintaining my neutral rating and price target of $109. The price target represents a one-year forward multiple of 14.5, which is above the peer group average of 14.0, but below the stock’s current one-year forward multiple of 15.5. I believe that my 2024 estimates are optimistic, given the increasing pricing pressure facing the industry. Yet, if the higher 2024 consensus EPS estimate looks achievable a year from now, the stock would have a better chance of keeping its current premium P/E multiple, which would give it upside above my price target of $109.
This is a summary of my recent update report on Merck & Co., Inc. (MRK). To obtain a copy of the complete report, please reach out to me using the contact information provided below:
April 6, 2023
Stephen P. Percoco
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Linden, New Jersey 07036
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