Opinions
Paul MacDonald
Merck & Company
MRK-N
PAST TOP PICK
Sep 14, 2017
Stock price when the opinion was issued
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Certainly some stocks are less vulnerable to issues involving tariffs. What comes to mind are healthcare companies. You could look at some of the beaten-down companies that really didn't do well last year, as they're doing quite well today. Try this name, which he owns.
Whole healthcare complex was weak in 2023 and 2024, so the valuations were reasonable coming into 2025. Current market downtrend plus today's threat of tariffs on pharmaceuticals, and we don't know how this will all end. Drug pipeline is particularly exciting.
Can't tell you when it will turn the corner, but it's a good component of a diversified portfolio.
Pharmas have not done well. MRK trades at 8x PE. They have one large drug, Keytruda, which makes up 46% of their revenues, which is risky. The chart looks terrible. But MRK has dozens of drugs in phase 2 and 3 trials. Also, this pays a fine dividend. Now is a fine time to enter this.
Bought is heavily this morning. Is a diversified, large-cap pharma with 45% of revenue is oncology. Keytruda goes off patent in 2028, so there's a race to offset that patent. Vaccines face issues--Gardisil isn't performing in China, and RFK Jr. is anti-vaccines. However, if they combine an enzyme with a drug like Keytruda, does that reset the patent? Does the patent continue? That is in debate.
Whole sector's been problematic, so this name could be just caught up in that downdraft. Fundamentally looks pretty good. Could be an opportunity. ROC last few years has been 7%, 9%, 9%, 10%, 11%. Nothing wrong with those numbers. Pretty clean balance sheet, decent working capital position.
Revenue growth last quarter down 1.6%. Before that, it usually ran around a positive 6-7%. Yield is 3.9%, chart looks great as they keep bumping it up once a year -- cashflow and payout ratio to support that look really healthy.
Premium contentMRK has taken a tumble as their long standing cancer drug approaches patent expiry in the next few years, leading some analysts to discount their valuation. It now trades at 13x earnings, 4x book and supports a 35% ROE. The yield is supported by a payout ratio under 50% of cash flow. The company is prudently using some cash reserves to retire debt and buy back shares. We recommend setting a stop-loss at $70, looing to achieve $102 -- upside potential of 19%. Yield 3.6%
(Analysts’ price target is $102.19)
(Top Pick Feb 22/17, Up 3%) It has traded in line with others. It is a wonderfully run company with a deep pipeline into diabetes and arthritis. They are in the forefront of immunotherapies for arthritis. They are the leaders. 15.5 times forward earnings. It should trade in a double digit PE. He likes it for leadership and diversification.