5
Merck & Co., Inc. (MRK)
- Equity
- US
- Healthcare
RISK
RETURN
Key risk factors
Negligible price volatility
Strong trading liquidity
Strong & resilient to price shocks
Key return factors
Overvalued vs peers
Good growth
Decent dividends
Company profileMerck & Co., Inc. operates as a healthcare company worldwide. It operates through two segments, Pharmaceutical and Animal Health. The Pharmaceutical segment offers human health pharmaceutical products in the areas of oncology, hospital acute care, immunology, neuroscience, virology, cardiovascular, and diabetes, as well as vaccine products, such as preventive pediatric, adolescent, and adult vaccines. The Animal Health segment discovers, develops, manufactures, and markets veterinary pharmaceuticals, vaccines, and health management solutions and services, as well as digitally connected identification, traceability, and monitoring products. It serves drug wholesalers and retailers, hospitals, and government agencies; managed health care providers, such as health maintenance organizations, pharmacy benefit managers, and other institutions; and physicians and physician distributors, veterinarians, and animal producers. The company has collaborations with AstraZeneca PLC; Bayer AG; Eisai Co., Ltd.; Ridgeback Biotherapeutics; and Gilead Sciences, Inc. to jointly develop and commercialize long-acting treatments in HIV. Merck & Co., Inc. was founded in 1891 and is headquartered in Kenilworth, New Jersey.
Valuation: Overvalued
Multiple
TTM
NTM
P/E
144.00
17.00
PEG
21.60
-
P/B
8.20
5.50
P/S
5.40
5.20
P/FCF
30.10
23.20
EV/EBITDA
41.40
23.90
From both historical and forecast perspectives, the stock is overpriced compared to similar stocks. In particular, the stock is reasonably priced on P/E, 'expensive' on EV/EBITDA, and trading at neutral levels on P/FCF.
Performance: Mixed
The stock's performance has been mixed in the past six months, with growth following a decline. There is no clear price trend compared to its global peers from the same sector and industry (as shown above). The stock has outperformed this peer group by 21ppts over past six months and grown 1ppts slower in the past month. This is largely true for peers from the same country and sector. With respect to the stock's valuation against its peers, its overall price performance is neutral.
Analyst view: Somewhat favourable
The average target price is 145 and suggests 11% upside potential. Usually, this means a HOLD recommendation among investment firms. This neutral recommendation suggests no significant price movement, up or down, in the next 12 months. The most optimistic analyst has a target price of 155.0. This translates into 18% upside potential in the best case. On the other hand, the most pessimistic analyst has a target price of 118.0. This is equivalent to 10% downside potential in the worst case.
Profitability: Average
RoE
Merck & Co., Inc. reported a return on equity (RoE) of 5.9% in the last 12 months, up from 0.9% in FY23. The market consensus projects an RoE of 9.1% in FY24, again behind its peers.
RoA
Another important profitability metric, return on assets (RoA), amounted to 2.2% in the last 12 months, an increase from 0.3% in FY23. The market analysts predict that RoA will be 3.5% in FY24, again weaker than its peers.
RoCE
In the last 12 months, the return on capital employed (RoCE) grew to 2.9%, below the peers. The consensus estimate for FY24 for RoCE is 22.1%, however, this time ahead of the peers.
Net margin
EBITDA margin
Historically, MRK has reported good net margins compared to its global peers. Specifically, in the last 12 months, this metric equalled 3.8%, a growth from 0.6% in FY23. The company has reported average EBITDA margins compared to its global peers in recent years. EBITDA margin amounted to 14.2% in the last 12 months, up from 9.5% in FY23.
RoIC / WACC = 1.6(good value creation)
The ratio of return on invested capital (RoIC) to the weighted average cost of capital (WACC) has been 1.6 in the past several years. This ratio implies a good shareholder value creation. Growth: Good
Revenue
EBITDA
EPS
Free cash flow
MRK reported revenue of USD 61 436mn in the last 12 months, up 2% from FY23. The dynamics of cash flow, as measure by free cash flow (FCF), were rather similar. EPS grew 513% from FY23 to USD 0.92. Market expects EPS to reach USD 7.73011 in FY24.Revenue growth has been constrained in the past several years (negative-to-neutral), while EBITDA growth has been weak. This all contributed to very fast EPS growth (strongly positive). The FCF trend is in line with EBITDA. We emphasize the highly volatile dynamics of EBITDA, EPS and FCF. On the positive side, revenue dynamics is very stable.
Dividends: Decent
Dividend paid
Dividend yield
The company has a track record of regular dividend payments. It has paid dividends in each of the past ten years. Dividend per share (DPS) has grown yearly, and there is an evident trend. In the past 12 months, the dividend yield has been good and slightly above its peers. The company distributes most of its profit as dividends (payout ratio above 75%, a negative factor). It will not be easy to sustain such a high payout ratio. It may also indicate a company’s lack of profitable growth opportunities, which suggests doubtful prospects. On average, the company pays dividends quarterly, which may appeal to investors valuing a regular income stream.
Default risk: Moderate
The risk of default is moderate. We note solid cash flow generation, among the positive credit factors. Among the negative credit factors, we point to slow historical revenue growth.
Volatility: Negligible
In normal market circumstances, MRK is not volatile. Put differently, without outstanding market volatility or shocking company news, the stock's price will stay within a narrow range. The stock's losses on its worst days (less than 1-5% of the time) will range from very low to negligible.
Stress-test: Negligible
In highly turbulent market conditions, MRK is not volatile. In other words, the stock will fall far less than the index in times of extreme market volatility or shocking company news. Standalone, the worst-day losses (less than 1% of the time) will likely be very low.
Selling difficulty: Very low
MRK boasts very high trading liquidity. The average private investor can sell his common position in the stock immediately. Liquidity is usually very stable and remains mildly favourable on the days with the lowest activity. The trading volume mostly stays the same even under highly turbulent market conditions.
Country risk: Very low
The institutional, legal, and compliance risks associated with the company's country are minimal. In combination with stringent business standards, shareholder rights are very highly protected.
Other risks: Negligible
No other major risks have been identified.