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Is Merck & Co. the Ultimate Recession-Proof Large-Cap Value Play?

Henry RiversFriday, Apr 18, 2025 1:10 pm ET
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

  1. 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.

  2. 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.

  3. 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.

MRK Closing Price

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.

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LoinsSinOfPride
04/18
Merck's undervalued, but those lawsuits are a wildcard. 🤔
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RamBamBooey
04/18
@LoinsSinOfPride True, lawsuits are a risk, but MRK's undervalued status might offset that.
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josh252
04/18
Keytruda's sales are insane, but patent cliff looms
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stydolph
04/18
@josh252 Patent cliff risk is real, but MRK's pipeline might cushion the blow.
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AdvantageNo3180
04/18
@josh252 Keytruda's sales are lit, but expiration looms.
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InjuryIll2998
04/18
Novartis is another story—peers matter when hunting value stocks.
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Critical-Peace-8319
04/18
@InjuryIll2998 Peers matter, but MRK's undervalued, bro.
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whatclimatecrisis
04/18
@InjuryIll2998 Novartis? Overpriced, IMO. Look at MRK instead.
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VegetaIsSuperior
04/18
Eli LiLLY's P/E is nuts compared to Merck. Value hunting here.
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MoonShark3000
04/18
@VegetaIsSuperior How long you planning to hold Merck? Curious if you're thinking years or just a quick flip.
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AdCommercial3174
04/18
MORNingstar's bullish on Merck, but is it too late to the party?
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sumitawinash
04/18
@AdCommercial3174 Maybe, depends on market vibes.
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ZhangtheGreat
04/18
Johnson & Johnson's P/E is more reasonable, but no Eli LiLLY upside.
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LogicX64
04/18
@ZhangtheGreat J&J's P/E is decent, but MRK's discount is huge.
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LogicX64
04/18
Holding $MRK for dividends and long-term growth potential.
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SmallVegetable4365
04/18
Dividend yield is juicy, but capital allocation's key long-term.
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Critical-Peace-8319
04/18
@SmallVegetable4365 Dividends r nice, but MRK's pipeline is the real M.V.P.
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roderik35
04/18
@SmallVegetable4365 Capital allocation's cool, but MRK's yield is juicy AF.
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Mylessandstone69
04/18
Merck's value is too compelling to ignore, but recession plays can be tricky.
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Ok_Statement1056
04/18
@Mylessandstone69 What’s your target price for MRK?
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BrianNice23
04/18
@Mylessandstone69 Agreed, MRK looks cheap.
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Zestyclose_Gap_100
04/18
Keytruda's sales are bonkers, but can their pipeline keep up?
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jvdr999
04/18
P/E ratio screams 'buy,' but patents expiring are a sneaky risk.
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AdvantageNo3180
04/18
I'm holding MRK for the dividends and long-term growth potential. Diversification is key.
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GoStockYourself
04/18
Merck's pipeline is fire, but those lawsuits 😬
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greenpride32
04/18
Merck's P/E ratio screams "value," but those lawsuits are a dark cloud. 🤔
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Tiger_words
04/18
@greenpride32 True, lawsuits are a worry, but Merck's fundamentals look solid.
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Napalm-1
04/18
Holy!🚀 MRK stock went full bull trend! Cashed out $490 gains!
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