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Dear Investors, 

Dear Investors,

Welcome to the fourth edition of our brand new TipRanks Smart Value Newsletter!

In each Newsletter, we aim to highlight an undervalued stock poised for long-term gains. Each week, our analysts will identify an overlooked opportunity – a company with strong fundamentals and a resilient business model, whose stock is trading below its intrinsic value.

Our selections will cover all economic sectors, as true Value can be found everywhere – and we will help you find it. Stocks we recommend will have been carefully analyzed and vetted using TipRanks’ data, ensuring you receive well-researched, high-quality opportunities aimed at delivering substantial, long-term value. We will present you with a comprehensive analysis that outlines our selection process, giving you clear insights into why each stock stands out as a top value opportunity.

With that in mind, let’s dive into this week’s top pick and explore why it could be a valuable addition to your Value portfolio.

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This Week’s Top Value Pick: Merck (MRK)

Merck (MRK) is a prominent global biopharmaceutical company specializing in the development, manufacturing, and marketing of prescription medicines, vaccines, biologic therapies, and animal health products. Headquartered in New Jersey, Merck operates worldwide through its Pharmaceutical and Animal Health segments, with its medicines and vaccines reaching over half a billion people.

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Legacy of Innovation 

Merck traces its origins to 1668, when Friedrich Jacob Merck founded a pharmacy in Darmstadt, Germany. The company expanded to the U.S. as a subsidiary of the German Merck Group, becoming an independent entity in 1919. Today, Merck & Co. holds exclusive rights to the “Merck” name in the U.S. and Canada, while operating as MSD in other global markets.

For over 130 years, the company has developed medicines and vaccines, contributing significantly to global health. In the 1930s, Merck scientists were the first to synthesize vitamin B1. In the decades that followed, Merck’s scientists were at the forefront of medicinal innovation, introducing groundbreaking treatments as streptomycin, cortisone, statins, and numerous drugs used for treatment of high blood pressure, heart disease, and other conditions.

Merck has also been a leader in vaccine development, creating the MMR, pneumococcal, Hepatitis B, HPV, and multiple other vaccines protecting millions of people around the world against preventable diseases.

The company’s influence expanded further with its 2009 merger with Schering-Plough, enhancing its research capabilities and product portfolio. With a legacy rooted in scientific breakthroughs, Merck continues to be a leader in healthcare innovation.

Today, Merck is the third-largest pharmaceutical company in the U.S., wielding a market cap of over $225 billion. With annual revenues of $64.2 billion, MRK is ranked #67 on the Fortune 500 list.

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Growth Drivers and Challenges 

Merck has strategically pursued acquisitions to bolster its portfolio and research capabilities across key therapeutic areas. In 2021, it acquired Acceleron Pharma, securing Sotatercept, a promising treatment for pulmonary hypertension, strengthening its specialty therapeutics segment. That same year, the company acquired Pandion Therapeutics, enhancing its presence in autoimmune disease treatments. ​

Continuing this strategy, Merck acquired Prometheus Biosciences in April 2023, focusing on innovative therapies for inflammatory bowel disease. In 2024, the company expanded its oncology and biopharmaceutical capabilities with the $1.3 billion acquisition of Modifi Biosciences and a $3 billion deal for EyeBio in July. ​

These strategic acquisitions have diversified Merck’s drug pipeline, enhanced its research and development efforts, and maintained its competitive edge in the evolving pharmaceutical industry.​

Merck’s key revenue drivers include pharmaceutical sales, with the oncology drug Keytruda leading the portfolio, alongside strong HPV vaccine sales from Gardasil and a growing animal health segment. Additionally, licensing agreements and collaborations provide significant income, allowing Merck to leverage its expertise for joint drug development.​

Keytruda, which accounted for 46% of Merck’s revenue in 2024, faces a patent expiration in 2028, opening the door for biosimilars. To mitigate this risk, the company is developing a subcutaneous formulation for easier administration and expanding its drug portfolio. Merck has built a robust pipeline with 20 potential new growth drivers, including Winrevair (a pulmonary hypertension biologic therapy) and Capvaxive (an adult pneumococcal conjugate vaccine), which have blockbuster potential. The company estimates these programs could generate over $50 billion in revenue by the mid-2030s.​

Additionally, Merck has tripled its late-stage development assets across a broad range of therapeutic areas. It continues to strengthen its U.S. manufacturing footprint, investing over $12 billion since 2018, with plans for another $8 billion in the coming years. This investment supports both existing products and future innovations, positioning the company for sustained growth despite potential regulatory challenges, including proposed tariffs on the pharmaceutical sector.

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Sustained Momentum

Merck has demonstrated steady growth, with revenues and diluted EPS increasing at a CAGR of 10.4% and 12%, respectively, over the past five years. This expansion has been fueled by its blockbuster oncology drug Keytruda, strong sales of Gardasil and Mavenclad, strategic acquisitions, and operational efficiency.

In fiscal 2024, MRK’s adjusted EPS jumped to $7.65 from $1.51 in the prior year, with total revenue rising 7% to $64.2 billion. The company’s robust results were driven by strong demand for its oncology drug Keytruda, which saw an 18% rise in sales to $29.5 billion, the successful launch of WINREVAIR, and strength in the animal health segment. Merck expects animal health revenue to more than double by 2035, with plans to introduce a number of new products, including a long-acting parasiticide, Bravecto Injectable and a JAK1 inhibitor in dermatology.

Looking ahead, Merck has guided for FY25 revenue of $64.85 billion and adjusted EPS of $8.95 at midpoint, slightly below analysts’ expectations of adjusted EPS of $9.23 on revenues of $67.4 billion. The softer outlook is attributed to weaker-than-expected Gardasil sales, particularly in China, where the company has temporarily halted shipments until mid-2025, as well as pricing pressures in the U.S. Additionally, a milestone payment of $0.09 per share related to its LaNova partnership has weighed on net income forecasts.

In December 2024, Merck secured an exclusive global license for MK-2010 (LM-299), a novel PD-1 / VEGF bispecific antibody for advanced non-small cell lung cancer (NSCLC) from LaNova. As a result, LaNova may receive up to $2.7 billion in milestone payments, including $300 million for technology transfer (expected in 2025), $140 million for development, $860 million for regulatory milestones, and $1.4 billion based on sales.

To offset Gardasil’s headwinds, Merck is expanding its pipeline, recently securing exclusive rights to develop and commercialize the experimental heart disease drug HRS-5346 from Jiangsu Hengrui Pharmaceuticals in a deal worth up to $2 billion. Despite near-term challenges, the company expects strong growth in the second half of FY25 and beyond, driven by oncology, animal health, and new product launches.

Financially, Merck maintains a solid foundation. Its debt-to-equity ratio has improved from 1.01 to 0.8 over the past five years, though it remains above the industry average of 0.28. However, strong earnings comfortably cover interest payments, and the company holds stable credit ratings of “A” from S&P and “A2” from Moody’s, reflecting low credit risk.

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Resilient Value

MRK has consistently prioritized shareholder returns through disciplined capital allocation. The company has increased its dividend for 14 consecutive years, averaging 6.3% annual growth over the past decade. The latest dividend increase – in January 2025 – has brought its dividend yield to 3.5%, more than double the healthcare sector average. With a conservative payout ratio and strong finances, Merck’s dividends remain well-supported and are expected to continue growing at a solid clip in the next several years.

Beyond dividends, Merck expanded its stock buyback authorization by $10 billion earlier this year, bringing the total to $12 billion. While share repurchases will remain modest, they reinforce the company’s commitment to enhancing shareholder returns.

Despite these strengths, Merck’s stock has dropped by more than 30% over the past year, weighed down by soft FY25 guidance, declining Gardasil sales in China, and broader economic concerns. This decline has left MRK trading at a P/E ratio of 11.5x, which represents about 35% discount to the Healthcare sector’s average. Moreover, the stock is now trading ~20% below its own long-term average, making it one of the more attractively priced pharmaceutical stocks. Furthermore, discounted cash flow models suggest MRK is undervalued by about 36%, reinforcing its appeal as a compelling investment opportunity.

Wall Street analysts share this optimism, forecasting an upside of over 26% for the next 12 months. The most bullish projections – coming from Jeffries, JP Morgan, and Goldman Sachs – suggest an even more significant gain of over 50%, reflecting confidence in MRK’s long-term growth strategy.

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Investing Takeaway

Merck stands out as a compelling value play in the pharmaceutical space. While near-term challenges have weighed on sentiment, the company’s core fundamentals remain resilient. It continues to return capital to shareholders through consistent dividends, backed by a disciplined payout strategy and strong cash generation. Merck trades at a notable discount to its historical valuation and sector peers, suggesting the market may be underestimating its long-term potential. With a robust pipeline, continued momentum in oncology and animal health, and a proven track record of strategic acquisitions, Merck is well-positioned for durable growth. For investors seeking undervalued quality with long-term upside, it offers a compelling entry point.

• Category: Smart Value