Stock of the Week


January 6th 2021

NYSE Symbol: MRK
Industry: Drugs
Price as of 12/31: $81.80


The markets wrapped up a volatile and unprecedented year in positive territory with most of the major averages at or near all-time highs. The tech-heavy Nasdaq Composite lead the rally in 2020 with a gain of 43.6%, posting its best one-year performance since 2009. The S&P 500 closed 2020 with a 16.3% gain. The Dow rose 7.3%. The healthcare sector performed well in 2020 as the COVID-19 pandemic turned our attention to the pharmaceutical space. A number of drug and biotech companies like Pfizer and Moderna moved rapidly to create vaccines while other blue-chip drug stocks were left behind including this week's featured stock, Merck. Merck was one of the Dogs of the Dow this past year falling nearly 10%, but is well positioned to rebound in 2021 and beyond thanks to a pending spinoff, new drugs in the pipeline and their growing oncology business.

Merck was slow in developing a Covid-19 vaccine, now months behind Pfizer and Moderna. Ironically, Merck has one of the industry's best overall vaccine franchises, led by Gardasil for cervical cancer. With recent stagnant growth, Merck is looking to spinoff of their unit called Organon, which will include their slower-growth women's health business and off-patent drugs. The company's top drug in the oncology space, Keytruda, continues to grow looking to generate over $14 billion in sales this year or 30% of Merck's total revenue. Merck's pipeline also looks strong including an oral antiviral for Covid-19 that is part of the government's Operation Warp Speed initiatives.

Following the spinoff of Organon, analysts see margins and cash flow expanding. Merck recently sold off their equity stake in Moderna. Merck has not disclosed their gain, but it could be in the hundreds of millions if not a billion. Merck with use their new cash and cashflow to build on their oncology franchise by joining with firms for drug-antibody combinations while also working with Moderna for messenger-RNA cancer therapies. It will also bring in oncology products through "bolt-on" acquisitions like the purchase of ArQule at the start of 2020. Merck's goal is to invent a world where cancer isn't just treated, but cured.

The improving cash flow should allow Merck to increase share buybacks along with more dividend hikes. Back in November, Merck boosted their quarterly cash dividend 6% to 65 cents from 61 cents. Shareholders now receive a 3.2% dividend while they wait for the pending spinoff and improving fundamentals. A number of recent analysts upgrades with price targets as high as $95 and $105 a share, or 17% to 29% upside from current levels also bodes well for this Dog in the Dow stock.

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