Merck Stock: Still Discounted To Graham P/E

Core Viewpoint - Merck (MRK) remains a compelling buy despite a price increase, with a current P/E ratio of approximately 14.6x, which is still reasonable when considering its growth potential and Graham P/E of about 23.7x, indicating a significant margin of safety [3][4][11] Valuation and Growth Potential - The stock is currently undervalued with a PEG ratio of only 0.78, suggesting that growth from pipeline drugs, particularly Molnupiravir, is not fully reflected in the stock price [1] - Analysts project a compound annual growth rate (CAGR) of 7.6% for EPS from fiscal years 2024 to 2028, with EPS expected to grow from $8.64 in FY2024 to nearly $12.5 by FY2028 [6][7] - The forward P/E ratio is anticipated to decline to about 10x by the end of FY2028, further supporting the investment thesis [7] Key Profit Drivers - Merck's diversified business model mitigates risks by generating revenue from both established therapies and vaccines in developing markets, unlike many peers reliant on blockbuster drugs [8] - The Keytruda franchise has shown strong sales growth, with a 21% increase in Q4 2023 sales to $6.61 billion, and is expected to maintain momentum due to its patent protection until 2028 [9] Financial Strength - Merck has demonstrated strong financial health, with an A+ rating and a low financial debt-to-equity ratio of 0.108, indicating a solid balance sheet [12] - The company has a relatively low payout ratio of about 35% on FY1 EPS, allowing for sustainable dividend growth despite a lower-than-average dividend yield of 2.38% [10][12]