Investment Ideas: Merck (NYSE: MRK) vs. Pfizer (NYSE: PFE)

This weekend, there was an article published at MarketWatch.com called "Merck vs. Pfizer", and it was about which was the better investment, MRK or PFE. If you are not familiar with these companies, these are two of the more prominent drug-makers/pharmaceutical companies in the world. MRK is the manufactuer of Vioxx, which has been all over the news because of the lawsuits surrounding deaths related to Vioxx use and MRK's voluntary recall. Pfizer is the maker of Viagra and also makes a lot of over the counter medicines such as Rolaids and Benadryl. Both companies literally have hundreds and hundreds of prescription and non-prescription drugs in their catalog.

Anyway, the point of the article is just what it says...who to invest in if you had to choose between them. In short, both companies are well off their all-time highs and have not performed well in the stock market the past couple of years, despite the growth and strong numbers they have achieved. However, times seem to be changing for both of them and each company seems to be on the rise. PFE is currently trading at $27.96 and MRK at $40.96 (MRK is a Dark Side Stock Pick at $39.65).

The article suggests that PFE is a better buy and over the next 2-5 years will give an investor a return of 74%-118% vs. MRK offering 31%-66%.

I have to disagree with this claim. I believe that MRK is the better buy and will return superior returns to PFE over the coming years.

1. MRK has had more law suit problems than PFE and these lawsuit problems have put pressure on the stock. However, MRK's product line is diverse and ultimately, these lawsuits will subside. PFE has had their share of legal problems, of coursem but the MRK ones have been more widely publicized, it seems. This is a downward pressure element that once removed, will allow MRK to move up more quickly than PFE that is essentially through their legal problem phases for the time being.

2. MRK has superior financial ratios across the board. MRK has more revenue per share, more cash per share, a 'cheaper' price to earnings ratio (both current and estimated), a cheaper price to growth ratio, a better debt position, and better return on equity and return on assets (despite MRK having lower operating and profit margins than PFE). MRK also has better year over year (yoy) revenue growth and earnings per share (EPS). In short, every major financial ratio points to MRK being a better 'value buy.' Compare MRK Key Statistics to PFE Key Statistics.

3. The article speaks that PFE has a bigger liquidity or buy out premium meaning that PFE is likely to fetch a higher buying price should they get bought out. I do not think this makes sense either as PFE is over 2 times as large as MRK and typically, the larger firms acquire the smaller firms. I do not believe that a merger of sorts is in the work for either of these companies anytime soon, however, I think MRK would stand to gain more from a buy out vs. PFE.

One thing that is in PFE's favor is the dividend yield. MRK has historically yielded 3.5%-3.7% in dividends to its investors; this is right in line with where it is currently at. PFE, on the other hand, has averaged a 2.1% yield over the same time period and it is currently at a 3.3% yield. So, this may suggest that the stock price would correct or be more likely to rise. The dividend yield is calculated by taking the annual dividend per share and dividing by the stock price. So, if PFE were to return to a 2.1% yield and be paying out the same dividend, the stock price would have to be at $46-$47 per share. Of course, one can argue that MRK has had a longer, stronger history of paying out higher dividends. It also seems that PFE is trying to play catch up in this arena. The dividend payout per quarter per share has grown from $0.11 to $0.24 since 2001, a 118% increase. MRK's has grown from $0.34 to $0.38, an 11% increase. This may also suggest that PFE is growing at a faster rate than MRK and is able to pay out more dividends, but I think this is more of a function of just paying out more of the available income to shareholders rather than representative of faster revenue growth. At some stage, companies mature, and it is in the best interest of the shareholders to distribute more cash out to the shareholders rather than retain it and keep it in the bank to grow.

All in all, both are good stock picks at this stage, I think, and both should do well over the next 12-24 months, barring any form of disaster, which is possible. But, I personally see MRK as a superior buy when compared to PFE.