Both Merck & Co., Inc. (MRK - Free Report) and Pfizer, Inc. (PFE - Free Report) reported upbeat first-quarter results on May 1. In fact, both pharma giants managed to outpace their earnings estimate but missed on the revenue front. However, the companies’ top and bottom lines rose year over year.
Merckhas a Zacks Rank #2 (Buy), while Pfizer possesses a Zacks Rank #3 (Hold). Now, but let’s see which stock is better positioned in terms of fundamentals, post earnings. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Other major earnings came from other pharma giants like Abbott (ABT - Free Report) and Johnson & Johnson (JNJ - Free Report) .
Q1 Earnings Performance
In the first quarter, Merck reported adjusted earnings per share of $1.05, surpassing the Zacks Consensus Estimate by six cents. The bottom line increased 19.3% from the year-ago period. Meanwhile, the company’s revenues of $10.04 billion fell short of the Zacks Consensus Estimate of $10.12, but increased 6% year over year. (Read More: Merck Beats on Q1 Earnings, Lags Sales, Raises Outlook)
Pfizer posted first-quarter earnings of 77 cents per share, beating the Zacks Consensus Estimate by only 3 cents. Earnings advanced 12% from the year-ago period, due to lower tax rates and share count. Moreover, revenues increased 1% year over year to $12.91 billion but missed the Zacks Consensus Estimate of $13.09 billion. (Read More: Pfizer Stock Falls on Q1 Sales Miss, Earnings Beat)
Merck has witnessed a rise of 5.8% in the past three months, while Pfizer has advanced only 2.6%. So Merck is a clear winner in this respect with better returns than both rival Merck and the broader industry, which declined 2% during the same period.
The most appropriate ratio to evaluate these two drug makers is perhaps EV/EBITDA. This metric is usually used to compare two stocks in 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, Pfizer with an EV/EBITDA ratio of 15.63 is overvalued than the broader industry, which has an EV/EBITDA value of 11.32. On the other hand, with an EV/EBITDA ratio of 8.19, Merck is underpriced than both Pfizer and the industry.
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 exorbitant drug pricing, which helps the sector maintain its steep margins.
With a net margin value of 31.44%, Pfizer performs better than rival Merck, which has a net margin value of 27.85%. In comparison, the broader industry has a net margin value of 26.86%.
The debt-to-equity (D/E) ratio is a good indicator of the financial health of a company and a good proxy for its debt-servicing capacity. In the context of a capital-intensive industry like pharma, this is an indicator of a company’s long-term sustainability.
Merck’s debt-to-equity ratio of 61.8% is significantly high compared with the industry’s D/E ratio of 56%. With a comparatively lower D/E ratio of 46.8%, Pfizer evidently has a better leverage condition.
Earnings History and Estimate Revisions
Merck delivered positive surprises in all the last four quarters, with an average earnings surprise of 8.55%. In comparison, Pfizer delivered an earnings beat in all the trailing four quarters and posted an average positive earnings surprise of around 5.23%.
When considering estimate revisions, Merck’s earnings estimate for the current year has improved 1.2% over the past 30 days. Meanwhile, Pfizer’s earnings estimate has declined by 0.3% over the same period.
In our comparative analysis, we found that both the two pharma giants have certain positives. Pfizer holds a better leverage position and has a higher net margin. However, in terms of valuation, Merck is more underpriced than Pfizer. Further, Merck has comparatively higher price performance than Pfizer.
Moreover, Merck also holds an edge over Pfizer when considering its average positive earnings surprise and estimate revisions. What clinches the case in favor of Merck at this point of time is that it has a better Zacks Rank than Pfizer. In this respect, our analysis clearly indicated that Merck is better positioned than Pfizer and thus calls for investors’ attention post earnings.
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