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Merck vs. Pfizer: Which is Better Ahead of Q3 Earnings?
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It’s been a relatively good year for pharmaceutical stocks, given that they have caught the eye of investors for the greater part of 2017. Despite occasional comments on drug pricing, this time around from President Trump, pharma companies have been largely spared close scrutiny on this front. Such a scheme of things is a far cry from Hillary Clinton’s comments on this issue in the run up to the last Presidential elections.
Additionally, Trump’s commitment toward deregulation has gladdened sector leaders. Meanwhile, there are some other factors that should continue to have a positive impact on pharma and biotech stocks. These are new product sales ramp up, R&D success and innovation, strong results, a higher number of FDA approvals and continued strong performance from legacy products. (Read: 5 Pharma & Biotech Stocks That Could Be Big Winners in Q3 Earnings)
Signs of the sector’s success are more than evident. The NYSE ARCA Pharmaceutical Index and the Nasdaq Biotechnology Index have gained 13.7% and 21.1%, respectively, year to date.
Other major earnings scheduled during this period include Aetna Inc. and Electronic Arts Inc. (EA - Free Report) .
Price Performance
The pharma sector’s recovery in fortunes is more than evident from the price performance of the broader industry, which is up 18.7% year to date. Both Pfizer and Merck are underperformers with respect to their broader industry. However, Pfizer is the better performer on this count, since it has gained 11.3% year to date versus Merck’s 6.1% gain.
Valuation
The most appropriate ratio to evaluate these two drug makers is perhaps EV/EBITDA. This metric is usually used to compare two stocks within the same industry. It is superior to other metrics such as P/E because it is not affected by the different capital structures of the two companies.
Coming to the two pharma majors, both Merck and Pfizer are undervalued relative to their broader industry, which has an EV/EBITDA value of 13.31. However, Pfizer holds the edge here with a lower EV/EBITDA value of 9.6, compared to Merck’s value of 10.4.
Dividend Yield
Both Pfizer and Merck have offered a superior dividend yield over the last one year period compared to the broader industry, which has returned 2.9% over this period. However, with a dividend yield of 3.5%, Pfizer is ahead of Merck on this count, but only because Merck has offered a dividend yield of 3% over the same period.
Gross Margin
The pharmaceutical industry enjoys higher profit margins than several other sectors. This is possibly one of the reasons why critics of the sector continually draw attention to allegedly exorbitant drug pricing, which likely helps the sector maintain its stiff margins.
With a gross margin TTM value of 67.9%, Merck underperforms rival Pfizer on this count. On the other hand, Pfizer sports a gross margin TTM value of 78.2%, which outperforms Merck as well as the broader industry, which has a gross margin TTM value of 72.5%.
Earnings History, ESP and Estimate Revisions
Considering a more comprehensive earnings history, Merck has delivered positive surprises in all the prior four quarters with an average earnings surprise of 8.1%. In comparison, Pfizer delivered an earnings beat in two of the trailing four quarters, with an average positive earnings surprise of -0.4%.
When considering Earnings ESP, Merck is once again the clear winner. With an ESP of -0.11%, Pfizer is at a disadvantage, since Merck holds a value of +0.12%. Additionally, Merck’s Zacks Consensus Estimate for the current year has increased by 0.2% over the last 30 days, while Pfizer’s has remained unchanged.
Conclusion
Our comparative analysis shows that Pfizer holds an edge over Merck when considering price performance, EV/EBITDA ratios and gross margins. It also sports a marginally superior dividend yield. However, when considering estimate revisions and a more comprehensive look at its previous earnings performance, Merck is clearly the better stock.
What clinches the case in favor of Merck at this point in time is that it sports a superior ESP value of +0.12% compared with Pfizer’s dismal reading of -0.11%. This is why it may be better to bet on Merck over Pfizer as they prepare to report earnings over the next few days.
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Merck vs. Pfizer: Which is Better Ahead of Q3 Earnings?
It’s been a relatively good year for pharmaceutical stocks, given that they have caught the eye of investors for the greater part of 2017. Despite occasional comments on drug pricing, this time around from President Trump, pharma companies have been largely spared close scrutiny on this front. Such a scheme of things is a far cry from Hillary Clinton’s comments on this issue in the run up to the last Presidential elections.
Additionally, Trump’s commitment toward deregulation has gladdened sector leaders. Meanwhile, there are some other factors that should continue to have a positive impact on pharma and biotech stocks. These are new product sales ramp up, R&D success and innovation, strong results, a higher number of FDA approvals and continued strong performance from legacy products. (Read: 5 Pharma & Biotech Stocks That Could Be Big Winners in Q3 Earnings)
Signs of the sector’s success are more than evident. The NYSE ARCA Pharmaceutical Index and the Nasdaq Biotechnology Index have gained 13.7% and 21.1%, respectively, year to date.
With Merck & Co., Inc. (MRK - Free Report) and Pfizer Inc. (PFE - Free Report) scheduled to report on Oct 27 and Oct 31, respectively, this may be a good time to consider which of these is a better stock. Both stocks carry a Zacks Rank #3 (Hold) rating. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Other major earnings scheduled during this period include Aetna Inc. and Electronic Arts Inc. (EA - Free Report) .
Price Performance
The pharma sector’s recovery in fortunes is more than evident from the price performance of the broader industry, which is up 18.7% year to date. Both Pfizer and Merck are underperformers with respect to their broader industry. However, Pfizer is the better performer on this count, since it has gained 11.3% year to date versus Merck’s 6.1% gain.
Valuation
The most appropriate ratio to evaluate these two drug makers is perhaps EV/EBITDA. This metric is usually used to compare two stocks within the same industry. It is superior to other metrics such as P/E because it is not affected by the different capital structures of the two companies.
Coming to the two pharma majors, both Merck and Pfizer are undervalued relative to their broader industry, which has an EV/EBITDA value of 13.31. However, Pfizer holds the edge here with a lower EV/EBITDA value of 9.6, compared to Merck’s value of 10.4.
Dividend Yield
Both Pfizer and Merck have offered a superior dividend yield over the last one year period compared to the broader industry, which has returned 2.9% over this period. However, with a dividend yield of 3.5%, Pfizer is ahead of Merck on this count, but only because Merck has offered a dividend yield of 3% over the same period.
Gross Margin
The pharmaceutical industry enjoys higher profit margins than several other sectors. This is possibly one of the reasons why critics of the sector continually draw attention to allegedly exorbitant drug pricing, which likely helps the sector maintain its stiff margins.
With a gross margin TTM value of 67.9%, Merck underperforms rival Pfizer on this count. On the other hand, Pfizer sports a gross margin TTM value of 78.2%, which outperforms Merck as well as the broader industry, which has a gross margin TTM value of 72.5%.
Earnings History, ESP and Estimate Revisions
Considering a more comprehensive earnings history, Merck has delivered positive surprises in all the prior four quarters with an average earnings surprise of 8.1%. In comparison, Pfizer delivered an earnings beat in two of the trailing four quarters, with an average positive earnings surprise of -0.4%.
When considering Earnings ESP, Merck is once again the clear winner. With an ESP of -0.11%, Pfizer is at a disadvantage, since Merck holds a value of +0.12%. Additionally, Merck’s Zacks Consensus Estimate for the current year has increased by 0.2% over the last 30 days, while Pfizer’s has remained unchanged.
Conclusion
Our comparative analysis shows that Pfizer holds an edge over Merck when considering price performance, EV/EBITDA ratios and gross margins. It also sports a marginally superior dividend yield. However, when considering estimate revisions and a more comprehensive look at its previous earnings performance, Merck is clearly the better stock.
What clinches the case in favor of Merck at this point in time is that it sports a superior ESP value of +0.12% compared with Pfizer’s dismal reading of -0.11%. This is why it may be better to bet on Merck over Pfizer as they prepare to report earnings over the next few days.
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
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