Big pharma has come under a lot of scrutiny from regulators and consumers as sentiment sours on the industry. As such, the market can be unforgiving when companies even slightly miss expectations or forecasts. This is the case with Merck & Co. Inc. (NYSE: MRK), as shares lost over 10% after reporting its fourth quarter of 2024 earnings results.
While the company reported a solid EPS beat by 11 cents as revenue rose 6.8% YoY to $15.62 billion, beating consensus estimates for $15.48 billion, it was the 2025 guidance that shook investor’s confidence. Merck guided EPS of $8.88 to $9.03 versus $9.13 consensus analyst estimates and revenues of $64.1 billion to $65.6 billion, which also fell short of consensus estimates of $67.07 billion.
The drop can be seen as a buying opportunity for the medical sector giant. Here are 4 no-brainer reasons to buy this dip in Merck stock.
1) Guidance Shortfall Was Due to a Deliberate Pause in Shipments to China
The whole of the top and bottom-line guidance shortfall can be attributed to Merck’s deliberate decision to pause shipments of its Gardasil to China from February to mid-2025.
Gardasil is its human papillomavirus (HPV) vaccine, which is used to prevent diseases and cancers caused by HPV. Gardasil sales in Q4 fell 17% YoY to $1.55 billion, which missed analyst estimates of $1.61 billion. For the full year 2024, Gardasil generated $8.6 billion in sales, down 3%.
The reason for the temporary shipment halts is to give the market a chance to work through its inventory in China and allow distributors to adjust inventory to demand. This obviously indicates a demand issue, but Merck insists that growth will resume in the second half of 2025. Gardasil dominates the market for HPV vaccines but still faces competition from GSK plc (NYSE: GSK) bivalent HPV vaccine Cervarix.
2) Merck’s Pipeline of Drugs Is Worth More Than $50 Billion
In its Q4 conference call, Merck CEO Rob Davis stated they have 20 potential new pipeline treatment growth drivers, almost all of which have blockbuster growth opportunities. Some of these include their adult pneumococcal conjugate vaccines WINREVAIR and CAPVAXIVE, now launching in the United States. Merck has many promising treatments in Phase 3 development. In fact, Merck has tripled the number of drugs in late-stage Phase 3 development in the past three years. Davis stated, “Based on the significant progress, we see over $50 billion of potential revenue opportunity from these programs.”
3) Merck Stock Presents a Value At These Levels
After the 10% price drop, Merck stock now trades at just 11.45x forward earnings compared to the industry average of 30.22x. Its trailing 12-month (TTM) price-earnings (P/E) ratio at 18.29 is below its 10-year median P/E of 25.36. Its price-to-sale (P/S) ratio is 3.45 compared to the industry average of 4.31. Its stock pays a 3.71% annual dividend yield with a strong debt-to-equity ratio of 0.79 and an A+ credit rating for its fortress balance sheet, generating a TTM operating cash flow of $18.26 billion. Shares are trading 35.3% off their highs, 37.91% off their consensus analyst price target, and at three-year lows.
4) MRK Stock Is Nearing a Triple Monthly Support Level
A triple support is comprised of three overlapping levels of trendlines, bumpers or indicators. Wider time frame charts tend to have firmer price levels.
MRK’s monthly candlestick chart illustrates a sharp decline from its highs. The stock is nearing a triple price level support. The three support levels converge around the $86.02 to $85.48 level, followed by another double support at the $83.05 to $82.56 level. The first triple support level is comprised of the lower tails trendline extension (purple), price support at $86.02 (green), and the monthly anchored VWAP support at $85.48 (orange). The second level of double supports is at the $86.02 support (green) and the $82.56 Fib 0.076 support (light green). The whole support cluster range is between $82.56 to $86.02.
Actionable Options Strategies: Bullish investors can consider using cash-secured puts at the Fib pullback support levels to buy the dip. If assigned the shares, then writing covered call at upside Fib levels executes a wheel strategy for income in addition to its 3.71% annual forward dividend yield.