In the tale of two large-cap pharma stocks it was a contrast in expectations, and performance on Tuesday morning, July 30 ’24, as Pfizer, with very low expectations coming into the release, but technically improved in the last month, sharply contrasted with Merck, which disappointed coming into the release, after seeing good growth around Keytruda, and Gardasil in prior quarters.
As of last Friday, July 26th ’24, Merck was +16.31% YTD as of Friday night’s close, while Pfizer was +11.25%, but after yesterday, Merck is now up YTD just +7.13%, while Pfizer as last night’s July 30 ’24 close was +13.41% YTD.
Merck Summary:
The prime culprit for yesterday’s 9.8% drop in Merck, was what seemed to be a rather slight slip in Gardasil revenue, – Merck’s HPV vaccine – which came in about $20 million below consensus, while Keytruda beat on revenue and Merck even guided for slightly higher revenue for ’24 during the conference call.
Another factor which a couple of analysts mentioned, was that the pipeline might not be developing as fast as investors would like to see with Keytruda’s patent expiration set for mid-2028, or roughly 4 years from now. That’s tougher to quantify in models and gives a blanket excuse for the sell-off, without putting the sharp pencil to the numbers.
What I thought was rather opaque was the Merck charge for the EyeBio acquisition in ’24, which would obviously impact EPS, but is typically a non-cash charge and the kind of charge which analysts and investors typically look through and ignore.
Despite the slight improvement in revenue guidance, Merck’s 2024 and 202 revenue estimates were revised lower to $64.1 billion and $68.6 billion, versus the prior Street estimates last quarter of $64.2 and $68.9 billion respectively. Not a big negative revision, but it’s noted.
2024’s EPS estimate was revised to $8.04 down from $8.65, with smaller revisions for ’25.
Valuation: At $113 – $115 per share, MRK is now trading at 14x and 12x 2024 and 2025 consensus estimates for expected growth this year that compares to ’22 $7.48 in EPS. (2023 was a strange year for Merck – that Prometheus Biosciences acquisition drive GAAP EPS down to $1.38 last year in ’23, versus the $7.48 earned in ’22, and now the expected $8.04 in 2024.)
Here’s what’s interesting: the 2025 Merck EPS of $9.91 currently has crept up gradually the last 8 quarters from $9.21, and it didn’t get revised downward much from yesterday’s report, (at least not yet) so valuing MRK off of 2025 EPS, the stock is trading at that 12x EPS for what is expected to be 23% EPS growth in ’25 vs ’24, may not be a complete stretch to validate holding the shares.
Morningstar raised their fair value estimate on MRK to $125 after yesterday, and noted Gardasil was the culprit for the quarter. Jefferies pharma analyst, Akash Tewari, does an excellent job, and he currently assigns a $150 price target on Merck, and reiterated a buy on Gardasil weakness.
The up and coming drug for Merck is Winrevair, which was above consensus but still small at $70 million.
After Merck peaked in December, 2000, it never made a new all-time high until late ’22, although spin-offs like Organon have reduced the cost basis of that all-time-high to something probably closer to low to mid $80’s. The point being that the Street seemed to quit following Merck given the performance in the earnings preview written on this blog over the weekend.
Merck conclusion: Talking to a technician on the key price levels for Merck, $119 was thought to be critical support, but since the stock is trading below that, there is a gap at $113 for Merck, from which it traded higher, but the stop-loss level that will be used for client positions will be $109 or the low price from the January 2 ’24 opening. That’s the low price for the year. There is other ways around this too: for taxable accounts, if the stock is trading at a loss, the loss may be taken now in the taxable account and look to add to an IRA, or just take the loss given the two years of market gains, and the prospects for rate cuts, and wait out the 31 days.
Frankly I personally think worries over the Keytruda patent expiration 4 years from now, are a bit premature.
The plan is to hold Merck for now, but that could change quickly depending on what happens with the market. And the trade may not be updated here.
Pfizer Summary: Pfizer reported a good quarter yesterday, with a 2% revenue beat and a 30% EPS ($0.60 vs $0.46 estimate) for y-o-y growth of 2%, 9% operating income growth and -2% decline in EPS.
PFE’s EPS is expected to grow from $2.54 in ’24 to $3 in ’26 for average growth of 19% with the stock trading at 10x – 11x earnings, but again 2024’s EPOS estimate is distorted with 2023’s EPS figure.
Sell-side comments seem to be focused on gross and operating margin opportunities thanks to the Seagen acquisition, which really could help improve cash-flow and free-cash-flow at Pfizer.
For now readers can assume that PFE is a mid-single-digit to slightly higher EPS grower and a low to mid single digit revenue grower over the next 2 – 3 years, with additional upside potential from cost savings and margin gains around Seagen.
PFE’s current dividend yield is 5.47%, and I suspect that will keep investors patient in an uncertain growth-stock market and further uncertainty around the Fed and FOMC.
A small amount of PFE was added yesterday, but more will be bought under $30 as a defensive stock.
Overall conclusion: The immediate goal is to stay with Merck but use the $109 2024 low as the stop-loss. Pfizer is solid here but it could trade back under $30 and more will likely be bought as a defensive i.e. uncorrelated position to growth, tech, GLP-1 pharma. Both these stocks have gone nowhere for 25 years, but – as Merck has proven – new pipeline drugs can change that quickly.
As a sidebar to the quarters, I wish both companies investor relations area would release the cash-flow statement with quarterly earnings, particularly given all the charges and such, and GAAP vs Non-Gaap so investors can get a look at “quality of earnings” by comparing net income to cash-flow. For example, Pfizer’s Eyebio charge, which obviously impacts Pfizer EPS, can be evaluated through a look at cash-flow and free-cash-flow for Pfizer’s 2nd quarter, but now investors have to wait 4 weeks to look at the 10Q when it’s released.
This blog compares cash-flow and free-cash-flow per share to actual EPS to gauge earnings quality. (It’s an interesting story why the SEC never mandated cash-flow per share, and instead EPS, when constructing the standards in the 1960’s – for another time).
Anyway, that’s the take on Merck and Pfizer post-earnings. Pfizer is the safer of the two stocks, but Merck has better upside potential if the weakness isn’t repeated in Q3 ’24.
None of this is advice or a recommendation, but only an opinion. Past performance is no guarantee of future results. Investing can involve the loss of principal even for short periods of time. All EPS and revenue estimates are sourced from LSEG. Opinions and portfolio positions can change quickly and those changes may not be updated here.
Thanks for reading.