Merck (NYSE: MRK) and Acadia Healthcare (NASDAQ: ACHC) are radically different healthcare stocks. Merck is one of the largest pharmaceutical companies in the world with 74,000 employees and a stock that offers a hefty dividend, while Acadia with its 20,000 employees is the largest stand-alone behavioral health company in the United States and eschews a dividend to focus on growth.
What they share is strong financial momentum combined with underpriced shares that scream value at a time when investors are looking for safe harbors whose shares are poised to rise this year.
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1. Merck: A safe and smart play
Merck has quietly been setting itself up for a strong year. The pharmaceutical company has had a slow start to 2022, with its shares up 0.76% since Jan. 1. But you need only to take a good look at the company's financials to see why the stock should be headed upward.
Merck has a low forward price-to-earnings (P/E) ratio of 15, far cheaper than most pharmaceutical companies with Merck's pedigree. The company has had six years of increased annual revenue. Last year, it reported revenue of $48.7 billion, up 17% over 2020. It also posted yearly earnings per share (EPS) of $4.86, up 173% over 2020.
What makes this exciting for me is that the gains haven't been due to a COVID vaccine, but from the company's burgeoning portfolio of therapies. Keytruda is the company's blockbuster drug. The oncology multi-tool brought in $17.1 billion in revenue last year, up 20% year over year. A recent study in Science Translational Medicine said the drug might be able to wipe out latent HIV cells, something no other drug has been able to do.
The company's other top drug, Gardasil, a human papillomavirus (HPV) vaccine, was reported as bringing in $5.6 billion in revenue, up 44% over 2020, while Januvia, which lowers blood sugar in type 2 diabetes patients, brought in $5.3 billion, roughly even with its 2020 revenue. The company also saw strong growth in its animal health therapies, which collectively reported $5.6 billion, up 18% over its 2020 revenue.
The well is not likely to run dry, either, as the company has about a hundred drugs in its pipeline, including 25 in phase 3 trials. In November, Merck completed its $11.5 billion acquisition of Acceleron Pharma, whose lead therapy, sotatercept, is in phase 3 trials as an add-on treatment for patients with pulmonary arterial hypertension.
The company also has a nice quarterly dividend, which it has raised for 12 consecutive years, including a 6.2% bump this year to $0.69, and offering a yield of 3.42% -- more than double the S&P 500 average's 1.27%. The company has shown a commitment to growing the dividend, raising it by 47% over the past five years.
2. Acadia: Riding the wave of mental health concerns
Acadia Healthcare operates 230 behavioral healthcare facilities, such as psychiatric hospitals and substance abuse centers, in 40 states and Puerto Rico -- and it is the largest stand-alone behavioral health company in the United States. Most of its payments come from Medicaid and commercial payors.
The company is on track for its third consecutive year of revenue and net income growth. In the third quarter, the company said it expected annual revenue between $2.295 billion and $2.315 billion compared to $2.09 billion last year. The company also forecasts diluted EPS of $2.51 to $2.59, up from $2.20 in the prior year. Over the past 10 years, the margin for quarterly earnings before interest, taxes, depreciation, and amortization (EBITDA) has increased 187%.
The company also has improved its debt situation, dropping its debt-to-equity ratio by 38% over the past 10 years. And as of last quarter, it was a low 0.252.
The pandemic has taken a toll on mental health, and Acadia appears to be in the right place at the right time, due to increased funding and acceptance of supporting mental health and substance abuse issues. One study, by Future Market Insights, puts the compound annual growth rate of the behavioral healthcare industry to be 3.4% from 2022 to 2028. According to the National Alliance on Mental Illness, one in five adults in the United States experienced mental health illness in 2020, with one in 15 adults experiencing a substance-use disorder and mental illness.
Acadia's shares are down nearly 10% so far this year. With a forward P/E of 18.8, the stock is priced well below that of the hospital/healthcare facilities' forward P/E average of 39.9.
Making your choice
I like both of these healthcare stocks, particularly at their current price points. Merck's oncology platform appears to be getting stronger; plus, its addition of Acceleron and its late-stage pipeline could produce a boost in sales in the coming year.
Acadia is a well-established player in behavioral health, and the increased focus on mental health that the pandemic exposed provides a likely driving force for continued revenue growth.
Merck, because of its dividend, might be a safer long-term bet, but Acadia likely offers more reward -- though with more risk -- in the coming years. Both should be solid, long-term investments.
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Jim Halley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
