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On Wednesday, Morgan Stanley (NYSE:MS) downgraded Merck (NSE:PROR) KGaA (MRK:GR) (OTC: MKGAF) stock from Overweight to Equalweight and reduced its price target from EUR190.00 to EUR160.00. The downgrade reflects a shift in the investment firm’s perspective on the German science and technology company’s growth potential, particularly within its Healthcare sector.
The decision by Morgan Stanley analysts stems from their observation that the expected re-rating of multiples, driven by a recovery in the Life Science and Electronics sectors, has not materialized. Instead, slow growth and a lack of significant developments in the Healthcare pipeline have tempered investor enthusiasm. According to the analysts, the market has been reluctant to shed the conglomerate discount on Merck KGaA’s valuation until there is a clear improvement in the growth trajectory of its Healthcare business.
Morgan Stanley’s downgrade comes after persistent investor concerns throughout 2024 regarding the effectiveness of the sum-of-the-parts (SOTP) valuation approach for Merck KGaA. Investors have indicated that a successful SOTP valuation would not be attainable unless the Healthcare division demonstrates solid performance. This sentiment has been a consistent point of resistance against the stock’s valuation.
The analysts also highlighted the potential risks associated with business development strategies aimed at revitalizing the top-line growth of Merck KGaA’s Healthcare division. They pointed out that any mergers and acquisitions (M&A) could carry execution risks, which may further impact the company’s stock performance in the market.
The price target adjustment to EUR160.00 from the previous EUR190.00 by Morgan Stanley underscores the challenges faced by Merck KGaA in reigniting growth within its Healthcare segment, as well as the broader concerns of the investment community regarding the company’s strategic direction and market valuation.
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