We recently compiled a list of the 10 Undervalued Wide Moat Stocks to Buy According to Analysts. In this article, we are going to take a look at where Merck & Co., Inc. (NYSE:MRK) stands against the other undervalued wide moat stocks.

The US economy was able to pass its first soft-landing test by exhibiting resilience through the risky disinflation process. Market experts believe that inflation has now markedly cooled, enabling the US Fed to pivot from rate cuts and transition to backstopping the slowing labour market. However, the final test is yet to be cleared. Market watchers continue to see whether the Fed can reduce the rates back to normal levels while stabilizing the economy.

The fundamentals in the corporate sector appear to be strong and Russell Investments believes this should help in sustaining a period of low layoffs. There has been an improvement in economy-wide corporate profits in the second quarter. The industry consensus earnings growth projections for Q3 2024 exhibit that the resilience will continue, while there are expectations of a broadening out from the mega caps.

Russell Investments believes that global equities took a breather in H2 2024. The investment management firm has seen a rotation into value stocks at the expense of growth stocks. The firm believes that the US small-cap equities have outperformed over the past few months as a result of expectations that the US economy will achieve a soft landing and that there will be lower interest rates.

Consumer Spending and CapEx Plans

The strong core retail sales in July and August and the revival of motor vehicle sales in July helped the consumer demand remain steady in Q3 2024. S&P Global Ratings estimates that consumer spending will be robust at 3.5% annualized for Q3. This will be the fastest pace of personal consumption expenditure (PCE) growth since Q1 2023. However, the rating agency believes that consumers are likely to limit their spending in the coming quarters due to numerous reasons. These include signs of cooling of the labor market, the real income growth running behind the real spending growth, and the household savings rate at a 2-year low, among other reasons.

Talking about the CapEx spending more broadly, business spending has been shaping up for a solid Q3 2024 growth. However, uncertainty around the degree of Fed easing and the 2024 US presidential election are some of the critical factors likely to hold the CapEx. The Fed easing might offer support to CapEx spending, although with a lag.

US Equity Market Outlook

The S&P 500 demonstrated strong performance so far this year. In H1 2024, the Mag7 and other Mega caps drove the performance of an index, whereas since the beginning of H2, the contributors were broad-based.

Despite a marginal decline in Mag7 earnings growth in Q2 2024, Deutsche Bank expects that their earnings will continue to increase at above-average rates. Despite valuations being stretched on a historical comparison, these companies are backed by fundamentals like strong earnings growth expectations. The bank expects annual earnings growth to remain at ~10% in the near term and the S&P 500 to reach ~5,800 points by Q3 2025 end.

The ratings agency expects the US economy to expand 2.7% in 2024 and 1.8% in 2025 (on an annual average basis). As compared to the June forecasts, these projections exhibit an increase of 0.2 and 0.1 percentage points. This increase in the forecasts primarily demonstrates the impulse from financial conditions which turned more positive. Moreover, expectations of stronger core goods consumption also contributed to this increase.

On a year-end basis, the ratings agency expects growth to come in at 2.0% in Q4 2024, reflecting a decline from 3.1% in Q4 2023. Apart from continued sluggishness in the housing and manufacturing sectors, the rating agency views that most recent activity indicators demonstrate that economic growth momentum has been running slightly above trend, even though it moderated since Q4 of the previous year. There has been some softening in the real income growth and there are clear signs of a slowdown in discretionary consumption. However, it expects inflation to slow further over the upcoming months. The labor market normalization supported in bringing down growth in unit labor costs (and improve labor productivity).

Amidst noise in the market, Wall Street experts believe that investors should take a balanced approach to investments.

Our methodology

To list the 10 Undervalued Wide Moat Stocks to Buy According to Analysts, we used the Finviz screener to screen for stocks that are trading lower than the forward earnings multiple of ~23.05x (since broader market trades at 23.05x, as per WSJ). Next, we chose the stocks having wide economic moats. Finally, we ranked the stocks according to their upside potential, as of September 25.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

A close-up of a person's hand holding a bottle of pharmaceuticals.

Merck & Co., Inc. (NYSE:MRK)

Average Upside Potential: 21.10%

Forward P/E Ratio (As of September 25): 11.45x

Merck & Co., Inc. (NYSE:MRK) operates as a healthcare company worldwide. It carries out operations via 2 segments, Pharmaceutical and Animal Health.

Merck & Co., Inc. (NYSE:MRK)’s technological lead, large scale, intellectual property, and strong pipeline continue to form its wide economic moat. Moreover, its commitment to innovation further strengthens its wide moat. The combination of a wide line-up of high-margin drugs, together with a pipeline of new drugs, should continue to help Merck & Co., Inc. (NYSE:MRK) generate strong returns on invested capital over the long term. The divestment of the Organon business should work in its favour as the remaining portfolio at the company holds a higher percentage of drugs with strong patent protection.

Moving forward, the company’s scale should continue to be supported by inorganic growth opportunities.  Merck & Co., Inc. (NYSE:MRK) expanded its presence in ophthalmology via the acquisition of EyeBio and it has established leadership in the production animal sector by acquiring Elanco's aqua business. These acquisitions should help the company broaden its market reach. Merck & Co., Inc. (NYSE:MRK) expects increased patient prescriptions and stock levels for WINREVAIR in Q3 2024.

In Q2 2024, Merck & Co., Inc. (NYSE:MRK) saw a gross margin of 76.8% as compared to 73.2% for Q2 2023. This rise was mainly because of the favorable impact of the product mix (which includes lower royalty rates related to KEYTRUDA and GARDASIL/GARDASIL 9), partially offset by increased amortization of intangible assets. For FY 2024, the company raised and narrowed the expected worldwide sales range to $63.4 billion - $64.4 billion.

According to Insider Monkey’s analysis of 912 hedge funds in Q2 2024, 96 held investments in Merck & Co., Inc. (NYSE:MRK). Cantor Fitzgerald reaffirmed an “Overweight” rating on the shares of Merck & Co., Inc. (NYSE:MRK), setting the price target of $155.00 on 16^th September.

Carillon Tower Advisers, an investment management company, released its first quarter 2024 investor letter. Here is what the fund said:

Overall MRK ranks 3rd on our list of the undervalued wide moat stocks to buy. While we acknowledge the potential of MRK as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than MRK but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.