Is Merck & Co. (MRK) the Most Profitable Cheap Stock to Buy Now?

Merck & Co. (MRK) has long been a stalwart in the pharmaceutical industry, but recent shifts in its valuation metrics have sparked debate: Is this undervalued stock poised for a rebound—or is its cheapness a red flag? Let’s dissect the data to find out.

Valuation Metrics: A “Cheap” Stock or a Value Trap?

To assess whether MRK is a bargain, we must first scrutinize its valuation. As of early 2025, Merck’s Price-to-Earnings (P/E) ratio stood at 11.58, a dramatic drop from its 12-month average of 39.9 and far below its five-year average of 77.34. This metric suggests the market has priced in near-term challenges, such as declining sales of its Gardasil vaccine in China and rising tariff costs.

But is this a buying opportunity or a sign of deteriorating fundamentals? Let’s compare to other metrics:
- Price-to-Book (P/B) Ratio: As of February 2025, MRK traded at 4.96x book value, below its 10-year median of 5.65x and well under its November 2024 level of 5.86x.
- Price-to-Sales (P/S) Ratio: Early 2025 estimates place this at 4.0–4.5x, slightly below its three-year average of 4.5x but still above the industry median of 2.3x.

Profitability Trends: Growth Amid Headwinds

Despite its valuation dips, Merck’s profitability remains robust. In Q1 2025, adjusted EPS rose 12% year-over-year to $2.22, driven by strong performance from its oncology franchise, particularly Keytruda, which generated $7.2 billion in sales. The animal health division also grew by 10%, underscoring diversification.

However, challenges persist:
- Gardasil Sales Decline: A 40% drop in Gardasil sales to $1.3 billion in Q1 2025—due to inventory overhang and weak demand in China—highlighted geographic risks.
- Tariff Costs: Approximately $200 million in annualized tariff expenses between the U.S. and China/Mexico are squeezing margins.

Pipeline Potential: The Long-Term Catalyst

Merck’s future hinges on its pipeline. With over 20 potential new products targeting areas like cardiovascular disease and rare cancers, management projects a $50 billion revenue opportunity by the mid-2030s. Notably:
- Winrevair (for pulmonary arterial hypertension) and Capvaxive (a next-gen pneumococcal vaccine) are nearing commercialization.
- A doravirine/ezlotrovir HIV therapy showed 100% efficacy in Phase III trials, positioning it as a blockbuster candidate.

These assets could offset the eventual loss of Keytruda exclusivity in 2028 and revive top-line growth.

The Risks: Tariffs, Competition, and China

• Geopolitical Tensions: U.S.-China trade disputes threaten profitability, particularly if tariffs escalate.
• Pipeline Delays: Any setback in late-stage trials (e.g., regulatory hurdles) could delay revenue.
• Market Saturation: Keytruda’s dominance in oncology faces increasing competition, including from biosimilars post-2028.

Conclusion: A Buy for Patient Investors

Merck’s valuation metrics—P/E of 11.58, P/B of 4.96, and P/S of ~4.2x—suggest it is undervalued relative to its historical averages and growth trajectory. While near-term headwinds like tariffs and Gardasil’s slump are real, the company’s $50 billion pipeline opportunity and 12% EPS growth in Q1 2025 argue for long-term optimism.

The stock’s year-to-date decline of 21% (versus a 3% drop in the pharmaceutical sector) hints at overreaction to short-term issues. For investors willing to look past quarterly noise, MRK offers a rare blend of cheap valuation and high-potential growth, making it a compelling buy at current levels.

In a sector where innovation drives value, Merck’s pipeline and profitability trends position it as a top pick for investors with a multi-year horizon. The question isn’t whether it’s cheap—it is—but whether you’re ready to ride out the volatility.