Is Merck & Co. the Ultimate Recession-Proof Large-Cap Value Play?
47min read As the specter of a recession looms, investors are turning to large-cap value stocks for stability and potential upside. Among them, Merck & Co. (MRK) stands out with a valuation so low it defies its historical norms—and even its peers’. But is this pharmaceutical giant truly a bargain, or is the market pricing in risks that could sink the stock? Let’s dig into the numbers.
The Case for Merck as a Value Leader
First, the math: Merck’s Price-to-Earnings (P/E) ratio of 10.90 as of April 2025 is a fraction of its historical averages. Over the past decade, its average P/E was 56.59, and as recently as December 2023, it hit a staggering 778.71 due to a temporary earnings collapse. Today’s P/E of 10.90 reflects a dramatic rebound in profitability—earnings per share (EPS) have surged—while its stock price has lagged, creating a classic value opportunity.
For context, here’s how Merck stacks up against peers:
- Eli Lilly (LLY): P/E 92.27
- Johnson & Johnson (JNJ): P/E 26.54
- Novartis (NVS): P/E 18.01
This gap suggests Merck is trading at a massive discount to its growth-oriented peers, even as its fundamentals improve. Morningstar, a key arbiter of stock classifications, has already labeled Merck Large Value in its Style Box—a designation reserved for companies with large market caps ($10B+), stable cash flows, and undervalued price multiples.
Why Merck’s Value Case Holds Up
Wide Moat, Stable Cash Flows:
Merck’s Keytruda, a blockbuster cancer drug, generated $18.9 billion in sales in 2024 alone. With a pipeline of new therapies in oncology and immunology, the company is less reliant on one-time hits like its pandemic-era vaccines. This diversification creates predictable cash flows, a hallmark of value stocks.Dividend Yield and Capital Allocation:
Merck’s 3.99% dividend yield (as of April 2025) is higher than its peers’, offering income investors a buffer against market volatility. Management has also prioritized disciplined capital allocation, including share buybacks and R&D spending on high-margin drugs. Morningstar rates its capital allocation as “Standard,” a vote of confidence in its ability to navigate a slowdown.Undervalued Relative to Fair Value:
Morningstar’s fair value estimate for Merck is $111 per share, while its stock price as of April . This 29% discount suggests the stock is trading well below its intrinsic worth—a signal for contrarian investors.
The Risks: Lawsuits and Patent Cliffs
No stock is without risks. Merck faces class-action lawsuits over its diabetes drug SGLT2 inhibitor, which has been linked to kidney injuries. These legal battles, ongoing as of April 2025, could strain its balance sheet. Additionally, some key patents, like those for Keytruda, will expire in the late 2020s, potentially eroding profits.
However, these risks are already reflected in Merck’s depressed valuation. As long as its pipeline delivers and litigation costs don’t balloon, the stock could rebound sharply.
Rationale for a Recession Play
Large-cap value stocks often thrive in recessions because they’re less sensitive to economic cycles. Merck’s reliance on essential drugs (e.g., cancer treatments, vaccines) insulates it from demand shocks. Meanwhile, its low P/E acts as a cushion: even if earnings dip slightly, the stock has room to rise toward its fair value.
Conclusion: Merck’s Value Is Too Compelling to Ignore
The data paints a clear picture: Merck is one of the most undervalued large-cap pharmaceutical stocks in 2025. Its P/E ratio is at a decade-low, its dividend yield is attractive, and its pipeline offers growth without the sky-high multiples of peers like Eli Lilly. While risks like lawsuits and patent expirations exist, they’re already priced into the stock.
With a market cap of $3.89 trillion—down 29% from its peak but still massive—Merck has the scale and cash reserves to weather a downturn. For investors seeking stability and upside in a recession, Merck’s blend of value, dividends, and resilient cash flows makes it a top contender.
As the saying goes, “Buy when there’s blood on the street.” Merck’s valuation suggests the blood is flowing freely—and the stock is primed for a rebound.
