Last Year’s Top Performer Looks to Repeat

The Dogs of the Dow is a trading strategy where you buy the 10 stocks with the highest dividend yields in the Dow Jones Industrial Average. 

The strategy outperformed the overall market in 2022, and some believe it will again this year. 

One of the new Dogs on this year’s list is Merck (MRK), a stock that consistently draws more than 1,000 searches each month, according to our Trackstar database. 

It was the top-performing Dow 30 stock last year and has an impressive portfolio of treatments, with Keytruda leading the pack at $5.4 billion in sales in Q3 2022. 

Financial pros may also like MRK because of its relatively low valuation, strong cash flow, and vast pipeline. 

Will MRK continue to outperform? 

Merck’s Business

Merck is a global drug manufacturer that develops and sells a wide range of pharmaceutical products. 

Some of its top-selling drugs include Keytruda for cancer, the Gardasil HPV vaccine, Januvia for diabetes and obesity, Janumet for diabetes and obesity, and the Varivax varicella (chickenpox) vaccine. 

Source: Merck

It boasts a massive pipeline with 82 programs in phase 2 clinical trials, 30 in phase 3, and three under review with regulatory authorities. 

The company’s sales consist of pharmaceutical products, vaccines, and animal health products. 

It segments its business into Human Health and Animal Health. 

Source: Merck

Financials

Source: Stock Analysis

Merck’s debt-to-free-cash-flow ratio has declined substantially over the years, going from 5.3x in 2017 to 1.9x over the last 12 months. Meanwhile, its current ratio has improved from 1.1x in 2018 to 1.4x over the last 12 months. 

The company has delivered 12 years of dividend growth and pays investors an annual dividend of $0.73 per share. 

Merck has a net operating cash flow of $19.7 billion, so it’s easy to see why Wall Street loves this stock. 

In fact, Wall Street titans like Jim Simons, Ken Griffin, and Ray Dalio have nine-figure positions in MRK. 

Valuation

Source: Seeking Alpha

Over the last five years, MRK has averaged a P/E GAAP ratio of 36.1x. It now trades at 19.0x. 

That’s middle-of-the-road among its peers. 

For example, Pfizer (PFE) and Novartis (NVS) are cheaper at 9.8x and 9.4x, and Eli Lilly (LLY) and Johnson & Johnson (JNJ) are noticeably higher at 54.6x and 25.1x. 

Merck’s price-to-sales ratio of 4.9x is about the same as JNJ. It’s above MRK’s five-year average of 4.3x and higher than PFE at 2.9x and NVS at 3.9x, but below LLY at 11.2x. 

Some analysts worry Merck’s earnings-per-share growth estimates are slightly below the industry average through 2027. 

But others believe Keytruda’s optimistic data on treating non-small cell lung cancer is an incredible opportunity to prolong franchise growth beyond the drug’s 2028 exclusivity deadline and drive significant sales for the company. 

Profitability

Source: Seeking Alpha

Merck’s Keytruda, Lynparza, Lenvima, and Reblozyl were responsible for nearly 40% of the company’s total revenue, as it continues to be a force in oncology.

The company’s net income margin is 25.9%, higher than LLY at 20.6% and JNJ at 20.0%, but lower than PFE at 29.8% and NVS at 41.7%. 

MRK has a strong EBIT margin at 34.5%, better than LLY at 30.1%, NVS at 27.2%, and JNJ at 26.0%. Only PFE is higher at 40.0%. 

Growth

Source: Seeking Alpha

Merck’s revenue growth has been outstanding relative to its peers over the last five years. 

Its five-year average of 8.2% is above LLY at 5.4%, NVS at 1.1%, and JNJ at 5.3%, though PFE has been even more impressive at 13.7%.

Keytruda sales growth was up 29.1% from Q3 2021, which significantly boosted Merck’s revenues. 

The company had YoY EBITDA growth of 43.6%, compared to LLY at 7.1%, NVS at 4.5%, JNJ at 0.6%, and PFE at 66.3%.

Our Opinion 9/10

MRK was one of the top-performing stocks in 2022. 

Over the last five years, it returned 146.8%. 

Despite share prices rising, the company is relatively cheap compared to its five-year average P/E ratio. 

It continues to succeed in drug trials and receive new approvals, along with its existing all-star portfolio of treatments. 

We rate Merck a buy and believe there’s further upside from here.

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