Merck vs. Pfizer: Which Stock is Better Before Q1 Earnings?

Investors are keenly awaiting earnings results from both Merck & Co., Inc. MRK and Pfizer, Inc. PFE. The main reason is that Merck KGaA's consumer healthcare division was acquired by Procter & Gamble Co. PG last month for $4.2 billion or €3.4 billion. Following the acquisition, the focus shifted toward Pfizer as Procter & Gamble was expected to acquire the consumer healthcare business unit of the former.

Meanwhile, the healthcare sector has jumped 9.9% in the past year, becoming one of the best performing sectors among the S&P 500. Signs of the sector’s well-being became more evident in the last one year, when the NYSE ARCA Pharmaceutical Index and the Nasdaq Biotechnology Index gained 2.9% and 4.6%, respectively.

With both Merck and Pfizer are scheduled to report on May 1, this may be a good time to figure out which of these is a better stock. Both pharma giants carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other major earnings scheduled on the same day include Apple Inc. AAPL and BP p.l.c. BP. 

Price Performance

Merck has witnessed a decline of 4.7% over the past year, while Pfizer has advanced 8.3%. So Pfizer is a clear winner in this respect with better returns than both rival Merck and the broader industry, which rose 4% during the same period.

Dividend Yield

In a year’s time, Merck and Pfizer have offered dividend yields of 3.22% and 3.71%, respectively, while the industry’s dividend yield is 3.25%. So Pfizer has taken lead here too, compared to both Merck and the broader industry.

Net 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 helps the sector maintain its steep margins.

With a net margin value of 30.61%, Pfizer performs better than rival Merck, which has a net margin value of 27.25%. In comparison, the broader industry has a net margin value of 26.23%.

Debt-to-Equity Ratio

The debt-to-equity (D/E) ratio is a good indicator of the financial health of a company and is 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.

Valuation

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 16.42 is overvalued than the broader industry, which has an EV/EBITDA value of 11.80. On the other hand, with an EV/EBITDA ratio of 8.38, Merck is underpriced than both Pfizer and the industry.

Earnings History and ESP

Considering a more comprehensive earnings history, Merck has delivered positive surprises in each of the prior four quarters, with an average positive earnings surprise of 8.5%. In comparison, Pfizer delivered an average positive earnings surprise of 5% in the prior four quarters, registering an earnings beat each time.

When considering Earnings ESP, Merck and Pfizer have ESP values of 0.00% and +1.36%, respectively, which implies that Pfizer is at advantage in this respect. Moreover, Pfizer’s earnings estimates for the current year have advanced by 0.3% over the last 60 days, slightly better than Merck’s 0.2% increase. 

Conclusion

Our comparative analysis shows that Merck holds an edge over Pfizer when considering only EV/EBITDA ratios and previous earnings performance. However, when considering price performance, leverage position, net margins and estimate revisions, Pfizer holds an advantage over Merck. Additionally, Pfizer has a better dividend yield than Merck, making it a clearly better stock.

What clinches the case in favor of Pfizer at this point of time is that it has a positive and better ESP than Merck, which is a leading indicator of a likely positive surprise. This is why it may be better to bet on Pfizer over Merck as both prepare to report earnings next week.

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Pfizer Inc. (PFE) : Free Stock Analysis Report
 
Merck & Co., Inc. (MRK) : Free Stock Analysis Report
 
Apple Inc. (AAPL) : Free Stock Analysis Report
 
BP p.l.c. (BP) : Free Stock Analysis Report
 
Procter & Gamble Company (The) (PG) : Free Stock Analysis Report
 
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