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Consider Buying This Blue Chip on the Dip

By Anirudh Shankar - Updated Mar 10, 2021 at 7:42PM

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Here's how you can take advantage of the latest sell-off in a stalwart pharma stock.

In today's volatile stock market, many investors have reservations about buying into new companies. Over the past few weeks, as every major stock index has continued to hit new all-time highs, it has seemed at times that every stock out there is overvalued.

But there is one blue chip the current market has left behind: Merck (MRK 1.23%). Founded in 1668, Merck is one of the oldest pharmaceutical companies in the world. This business has been at the forefront of innovation and product creation for centuries, and it shows no signs of slowing down. The small hiccup in the stock price that has put the stock on sale today should not be seen as a deterrent. Instead, it's a great opportunity for long-term investors to acquire shares and watch them rise. 

A lab technician's hands with a dropper and some beakers

Image source: Getty Images.

A disappointment, not a catastrophe

Earlier this month, the U.S. Food and Drug Administration (FDA) voted unanimously against approval for Merck's flagship drug, Keytruda, to be used as immunotherapy for certain indications of breast cancer. While the news was a disappointment, Keytruda has been approved to treat bladder cancer, classical Hodgkin's lymphoma, colorectal cancer, esophageal cancer, kidney cancer, liver cancer, melanoma, and many more indications.

The stock has been down about 10% in February, but given Keytruda's leading status in treating all kinds of cancer, this one denial is unlikely to keep Merck from dominating the cancer immunotherapy market and continuing to grow cash flow in the future. 

Keytruda leads the charge

Over its storied history, Merck has shown its ability to deliver shareholder value time and time again. In the past 10 years, Merck shareholders have seen a 132% return on their investment with a 63% growth in the dividend. In just the past five years, annualized growth has reached 12.5%, with dividend growth of 6.5% per year. The dividend has now reached 3.5%, compared to the S&P 500's average of about 2%.

Usually, when a company grows bigger and bigger, that growth tends to get slower and slower. But that has not been the case at all with Merck. Keytruda is poised to deliver 29% in annual sales growth over 2020, to $14.4 billion, but that isn't the company's only shining star. Merck's $3-billion-per-year HPV vaccine, Gardasil, has seen sales quadruple in the past two years on its success in treating HPV in all 200-plus of its forms. 

No patent cliff in sight

Patent security is a huge concern for investors in pharma stocks. Keytruda does face some major patent cliffs, but not for a few years, with global patent security only expiring around 2026. Until then, investors should be poised for ample revenue and earnings growth -- and impressive returns thanks to dividends and price appreciation.

So far, no other companies have mentioned working on biosimilars that might take market share away from Keytruda. It's also encouraging that Keytruda's biggest competitor in the oncology space is the Bristol Myers Squibb (BMY 1.64%) medication Opdivo, which has seen sales growth flatten over the past few years even as Keytruda continues to grow.

The right time to buy

When you put money into a stock, you're buying part of a business. And in Merck's case, that business is thriving. The cash flow looks great, with year-over-year earnings-per-share growth of 14.4% from 2019 to 2020; sales growth for Keytruda and Gardasil was 28% and 44%, respectively, in just the most recent quarter!

At its current forward price-to-earnings ratio of just 11.5, Merck trades at almost a 25% discount to its historical levels of about 16. I think the stock offers a 35% upside from here as well as strong dividend growth -- making it suitable for healthcare investors with all kinds of objectives. 

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Stocks Mentioned

Merck & Co., Inc. Stock Quote
Merck & Co., Inc.
MRK
$93.13 (1.23%) $1.13
Bristol Myers Squibb Company Stock Quote
Bristol Myers Squibb Company
BMY
$78.96 (1.64%) $1.27

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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