Underappreciated healthcare stock Organon (NYSE:OGN), which was spun off from pharma giant Merck (NYSE:MRK) in 2021, looks like an enticing opportunity for both value investors and income investors. I’m bullish on this overlooked healthcare spinoff due to its recent momentum, remarkably cheap valuation, stable and profitable business, and attractive 5.4% dividend yield.
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What Is Organon?
This $5.4 billion company has three primary businesses: women’s health, biosimilars, and established brands (off-patent drugs). While these may not be the most exciting or highest-growth segments within the healthcare market, they are all stable, profitable businesses that generate cash and enjoy large end markets.
Strikingly Cheap Valuation
It’s difficult to overstate just how cheap Organon is. The stock is up an impressive 50.8% year-to-date after bottoming out last December, and even after this momentous run, it still trades at a ridiculously cheap valuation of just 4.7 times consensus 2024 earnings estimates. Looking out to 2025 consensus estimates, the stock is similarly cheap, trading at just 4.6 times earnings.
At a time when the S&P 500 (SPX) is trading at 23.6 times earnings, well above its historical average, I believe this is the type of heavily discounted stock that deep-value investors should be getting excited about.
Based on this cheap valuation, many would assume that the company’s sales are a shrinking iceberg, but they’re not. Organon recently reported first-quarter results, and sales actually grew 7% year-over-year (ex-FX effects), with all three business franchises contributing to the growth. Biosimilars stood out as a particularly attractive segment, with an impressive 46% year-over-year revenue increase.
While no one is going to mistake Organon for a supercharged growth stock living life in the fast lane, this solid sales growth is nothing to be ashamed of.
It should be noted that the company has a significant amount of debt. It has $8.7 billion of debt versus a market cap of $5.4 billion. This is a significant debt load, but it is not unmanageable, and the company has been paying down debt since the 2021 spinoff. Even when accounting for this debt, the company still looks cheap, with an EV/EBITDA multiple of just 9.3. This is a useful metric for valuing companies with debt, as enterprise value takes both debt and equity into account.
Beyond its debt and the fact that it isn’t growing at breakneck speed in a world where many investors are chasing hypergrowth, it’s hard to say why Organon is so cheap. One reason could be that it is a spinoff. Spinoffs are often poorly understood by the market and don’t always find their footing with investors right away. Some investors assume that they must be bad businesses. Otherwise, the parent company wouldn’t have spun them off.
Spinoffs like Organon also simply haven’t had time to establish a long-term shareholder base that is familiar with and comfortable with the stock. Similarly, spinoffs often don’t enjoy the same breadth and depth of analyst coverage as more established stocks. For example, Organon has just four analysts who have assigned ratings to it within the past three months. Meanwhile, Merck, its larger and more established former parent company, has 18 analysts actively covering the stock.
As Organon continues to exist as a standalone company and more investors and analysts become familiar with the stock, I expect its valuation to increase over time.
Sizable Dividend
In addition to being an inexpensive deep-value investment, Organon comes with an attractive 5.4% dividend yield. This yield is substantially higher than the S&P 500’s 1.3% yield and higher than the risk-free 4.2% yield offered by 10-year treasuries. It is also more than double Merck’s yield of 2.3%.
Business Diversification
Another potentially attractive aspect of Organon is that while the company is based in the United States, the majority of its business comes from outside the U.S. Therefore, an investment in Organon can help investors diversify their portfolios and gain exposure to international and emerging markets without leaving the U.S. stock market.
Is OGN Stock a Buy, According to Analysts?
Turning to Wall Street, OGN earns a Moderate Buy consensus rating based on two Buys, two Holds, and zero Sell ratings assigned in the past three months. The average OGN stock price target of $23.00 implies 8.9% upside potential from current levels.
Strong Smart Score
Organon is viewed positively by sell-side analysts, and it also grades out favorably from a quantitative perspective. Organon receives a 9 out of 10 Smart Score from TipRanks’ Smart Score system. The Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It gives stocks a score from 1 to 10 based on eight market key factors. A score of 8 or above is equivalent to an Outperform rating, so Organon’s Smart Score of 9 is another feather in the stock’s cap.
The Takeaway: Compelling Combination of Value and Yield
I’m bullish on this underappreciated healthcare spinoff because its inexpensive valuation and big-time dividend yield create a compelling combination that makes it an appealing investment opportunity for value investors and income investors alike.
