2018 Outlook: How Exxon, GE, IBM, Merck and Disney Could Be the Top Dow Stocks

Merck: Can it reverse its recent losses?

Merck & Co. Inc. (NYSE: MRK) also has been a disappointing Dow stock in 2017, with its total return down about 5%. Analysts have a very low growth target on earnings and revenues in 2018. But at $54.50 a share, after a handy sell-off from earlier highs this year, Merck’s consensus analyst target of $65.36 implies upside of 20%. That would be a total return of more than 23%, if you include the 3.4% dividend yield.

The big downward driver for Merck in 2017 has been this huge disappointment in Keytruda being withdrawn as a lung cancer drug filing for patients in the European Union. Merrill Lynch has remained quite bullish here, and Merck also recently committed to a $10 billion stock buyback plan that could keep a floor under Merck if shares were to remain under their highs.

Merck could also pleasantly surprise the markets with more investments in biotech or by acquiring more future support via buying companies with promising new pipelines. Merck is valued at only about 13.5 times next year’s consensus earnings from operations.

The stock has a 52-week trading range of $53.63 to $66.80, and Merck has a market cap of $147.9 billion.

Walt Disney: Media deals versus Death Stars

Walt Disney Co. (NYSE: DIS) has endured a very strange couple of years. The consensus target price of $109.58 is only about 3% higher than the $105.90 current share price. What is interesting here is that Disney’s 52-week high of $116.10 is another 6% higher than the consensus target, and Disney shares peaked at $120 back in mid-2015.

The gains from Star Wars and Pixar have long been factored in, and more Star Wars installments will only grow, with a new trilogy and character-specific films. Investors have continued to remain more than concerned about the continued customer departures of ESPN subscribers. And now Disney may get deeper into networks with multi-billion-dollar acquisitions of certain 21st Century Fox assets. What if 2018 becomes the pivot point?

With a large stake in Hulu, Disney is going to spit its over-the-top cord-cutter service by launching its own platform and eventually exiting Netflix. Parents have no choice but to subscribe to the Disney service, and parents also know that there seems to be inelastic demand for Disney’s theme park tickets. The 1.5% yield likely will be heading up again in 2018.

RBC Capital Markets has a stronger view with a $125 price target. Without considering any merger gains (or subtractions) on operating earnings, Disney is valued at about 17 times next year’s consensus earnings expectations.

Walt Disney shares have changed hands between $96.20 and $116.10 in the past 52 weeks, and the market cap is $160.3 billion.

Please note that consensus analyst price targets and forward valuations were based on snapshot data from Thomson Reuters.