Both Merck & Co., Inc. MRK and Pfizer, Inc. PFE reported upbeat first-quarter results earlier this week. While, Merck posted better-than-expected earnings and revenues, Pfizer managed to outpace its earnings estimate but missed on the top line.
Both Pfizer and Merck have a Zacks Rank #3 (Hold), but let’s see which stock is better positioned in terms of fundamentals. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Q1 Earnings Performance
For the first quarter, Pfizer reported adjusted earnings per share of 69 cents, beating the Zacks Consensus Estimate by a couple of cents. The bottom line increased 3% from the year-ago period. The company’s revenues of $12.78 billion fell short of the Zacks Consensus Estimate of $13.04 billion and decreased 2% year over year. Currency movement negatively impacted Pfizer’s first-quarter revenues by 1% or $116 million. (Read More: Pfizer Q1 Earnings Beat, Sales Lag, 2017 View Intact)
Merck posted first-quarter earnings of 88 cents per share, surpassing the Zacks Consensus Estimate by 5 cents. However, earnings declined 1.1% from the year-ago period. Revenues not only increased 1% year over year to $9.4 billion but also beat the Zacks Consensus Estimate of $9.3 billion. Merck’s Pharmaceutical segment’s revenues increased 1% year over year to $8.2 billion, offsetting the negative impact of currency movement. (Read More: Merck Beats on Q1 Earnings & Sales, Ups Annual View)
Shares of both Pfizer and Merck have notched up gains since Nov 8, 2016, when Donald Trump won the Presidential election. However, Pfizer is a clear winner on this respect with a return of around 11.5%, ahead of the Large Cap Pharmaceuticals Sector’s advancement of around 9.1%. Merck has increased only 4.7% during the same period.
Here, we have used Zacks Value Score to evaluate these two stocks from a valuation perspective. Typical value investors will look at P/E ratios, PEG ratios and Price-to-Book ratios among others. But, the Zacks Value Score takes many other ratios under consideration and conclusively indicates which stock is relatively more undervalued.
Pfizer has a Value Score of ‘B,’ while Merck has a Value Score of ‘C.’
Compared to other industries, drug development companies have relatively higher net margin levels. This is mainly because mature pharma companies like Pfizer and Merck deal in diversified business segments as well as develop and market blockbuster drugs.
The net profit margin (TTM) for Pfizer is 86.3%, which is significantly higher than the Large Cap Pharmaceuticals Sector’s level of 16.4%. Merck has net profit margin TTM of 37.1%, significantly lower than that of Pfizer.
In the last one-year period, the dividend yield for Pfizerwas higher than the Large Cap Pharmaceuticals industry, which offered a yield of 3.5%. While Pfizer returned 7.1%, Merck had a negative dividend yield of 13.6% during the same period.
Earnings History and Estimate Revisions
Merck delivered positive surprises in all the last four quarters, with an average earnings surprise of 4.4%. In comparison, Pfizer delivered an earnings beat in only two of the trailing four quarters and posted an average negative earnings surprise of around 0.4%.
When considering estimate revisions, Pfizer’s earnings estimate for the current year has improved 0.5% over the last 30 days. Meanwhile, Merck’s earnings estimate has advanced by only 0.3% over the same period.
In our comparative analysis, we found that both the two pharma giants have certain positives. Pfizer registered a stronger price performance, delivered a significantly higher dividend yield and has better estimate revisions. In terms of valuation as well, Pfizer is more underpriced than Merck. However, Merck holds an edge over Pfizer only when considering its average positive earnings surprise. Our analysis clearly indicated that Pfizer is better positioned than Merck and thus calls for investors’ attention post earnings.
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