Merck & Co Inc (MRK, Financial) has been a focal point for investors, with its stock experiencing a daily loss of 0.32% and a 3-month loss of 1.21%. Despite these figures, the company boasts an Earnings Per Share (EPS) (EPS) of 1.22. The question that arises is, is Merck fairly valued? This article aims to delve into the financials and intrinsic value of Merck, providing a comprehensive analysis for potential investors. Read on to find out more.
Company Introduction
Merck & Co Inc is a renowned pharmaceutical company that develops products for a variety of therapeutic areas, including cardiometabolic disease, cancer, and infections. The firm's immuno-oncology platform is a significant contributor to its overall sales. Merck also has a robust vaccine business, with treatments to prevent hepatitis B, pediatric diseases, HPV, and shingles. The company also sells animal health-related drugs. Geographically, just under half of the company's sales are generated in the United States.
As of August 28, 2023, Merck's stock price stands at $109.86, which is fairly close to its GF Value of $105.51. The GF Value is an estimation of the stock's fair value, calculated based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates.
Understanding GF Value
The GF Value is a proprietary measure that gives an overview of a stock's intrinsic value. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) at which the stock has traded.
- A GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
According to our valuation method, Merck (MRK, Financial) is estimated to be fairly valued. The GF Value suggests that the stock's fair value is based on historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. On the other hand, if the share price is significantly below the GF Value calculation, the stock may be undervalued and have higher future returns. Given its current price of $109.86 per share, Merck's stock is estimated to be fairly valued.
As Merck is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
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Financial Strength
Companies with poor financial strength pose a high risk of permanent capital loss for investors. To avoid this, it's crucial to review a company's financial strength before purchasing shares. Both the cash-to-debt ratio and interest coverage are great ways to gauge this. Merck has a cash-to-debt ratio of 0.17, ranking worse than 77.62% of 1050 companies in the Drug Manufacturers industry. The overall financial strength of Merck is 5 out of 10, indicating fair financial strength.
Profitability and Growth
Companies that have been consistently profitable over the long term pose less risk to investors. Higher profit margins usually indicate a better investment compared to a company with lower profit margins. Merck has been profitable 10 out of the past 10 years. Over the past twelve months, the company had a revenue of $58.30 billion and an Earnings Per Share (EPS) of $1.22. Its operating margin is 10.95%, which ranks better than 65.41% of 1035 companies in the Drug Manufacturers industry. Overall, the profitability of Merck is ranked 8 out of 10, indicating strong profitability.
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Merck is 15.4%, which ranks better than 77.72% of 911 companies in the Drug Manufacturers industry. The 3-year average EBITDA growth is 23.9%, which ranks better than 71.7% of 887 companies in the Drug Manufacturers industry.
ROIC vs WACC
Another way to assess the profitability of a company is to compare its return on invested capital (ROIC) and the weighted cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. Ideally, the return on invested capital should be higher than the weighted cost of capital. For the past 12 months, Merck's return on invested capital is 4.81, and its cost of capital is 6.28.
Conclusion
Overall, Merck (MRK, Financial) stock is estimated to be fairly valued. The company's financial condition is fair, and its profitability is strong. Its growth ranks better than 71.7% of 887 companies in the Drug Manufacturers industry. To learn more about Merck stock, you can check out its 30-Year Financials here.
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