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Value Investing Research Since 2006

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Tuesday, January 16, 2018

Merck & Co Inc Valuation – August 2016 $MRK


Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – August 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Merck & Co Inc (MRK) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Merck & Co., Inc. is a global healthcare company. The Company offers health solutions through its prescription medicines, vaccines, biologic therapies and animal health products, which it markets directly and through its joint ventures. It operates through one segment, Pharmaceutical. The Company’s Pharmaceutical segment includes human health pharmaceutical and vaccine products marketed either directly by the Company or through joint ventures. Human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. The Company sells these human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed healthcare providers. The Animal Health segment discovers, develops, manufactures and markets animal health products, including vaccines. The Company’s animal health products are sold to veterinarians, distributors and animal producers.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of MRK – August 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $175,717,515,100 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.87 Fail
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 0.49% Fail
6. Moderate PEmg Ratio PEmg < 20 25.80 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 4.05 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.87 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.82 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

MRK value chart August 2016

EPSmg $2.44
MG Growth Estimate 1.24%
MG Value $26.80
Opinion Overvalued
MG Grade C+
MG Value based on 3% Growth $35.42
MG Value based on 0% Growth $20.76
Market Implied Growth Rate 8.65%
Current Price $63.01
% of Intrinsic Value 235.09%

Merck & Co., Inc. is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings stability or growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $2.26 in 2012 to an estimated $2.44 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 8.65% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Merck & Co., Inc. revealed the company was trading above its Graham Number of $30.56. The company pays a dividend of $1.83 per share, for a yield of 2.9%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 25.8, which was below the industry average of 38.69, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-9.03.

Merck & Co., Inc. receives an average overall rating in the ModernGraham grading system, scoring a C+.

Stage 3: Information for Further Research

MRK charts August 2016

Net Current Asset Value (NCAV) -$9.03
Graham Number $30.56
PEmg 25.80
Current Ratio 1.87
PB Ratio 4.05
Current Dividend $1.83
Dividend Yield 2.90%
Number of Consecutive Years of Dividend Growth 6

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GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 6/1/2016
Total Current Assets $27,926,000,000
Total Current Liabilities $14,918,000,000
Long-Term Debt $23,642,000,000
Total Assets $96,475,000,000
Intangible Assets $38,124,000,000
Total Liabilities $53,118,000,000
Shares Outstanding (Diluted Average) 2,789,000,000

Earnings Per Share History

Next Fiscal Year Estimate $2.65
Dec2015 $1.56
Dec2014 $4.07
Dec2013 $1.47
Dec2012 $2.00
Dec2011 $2.02
Dec2010 $0.28
Dec2009 $5.65
Dec2008 $3.63
Dec2007 -$1.04
Dec2006 $2.03
Dec2005 $2.10
Dec2004 $2.62
Dec2003 $3.05
Dec2002 $3.14
Dec2001 $3.14
Dec2000 $2.90
Dec1999 $2.45
Dec1998 $2.15
Dec1997 $1.87
Dec1996 $1.56

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $2.44
Dec2015 $2.30
Dec2014 $2.44
Dec2013 $1.84
Dec2012 $2.26
Dec2011 $2.29
Dec2010 $2.32
Dec2009 $3.05
Dec2008 $1.79
Dec2007 $1.17
Dec2006 $2.38
Dec2005 $2.64
Dec2004 $2.93
Dec2003 $3.03
Dec2002 $2.93
Dec2001 $2.72
Dec2000 $2.40

Recommended Reading:

Other ModernGraham posts about the company

5 Overvalued Dow Components – July 2016
Merck & Co Inc Valuation – March 2016 $MRK
Merck & Co Valuation – November 2015 Update $MRK
Merck & Co Inc Valuation – March 2016 $MRK
Merck & Co Valuation – November 2015 Update $MRK

Other ModernGraham posts about related companies

Vertex Pharmaceuticals Inc Valuation – August 2016 $VRTX
Amgen Inc Valuation – August 2016 $AMGN
Pfizer Inc Valuation – August 2016 $PFE
Abbott Laboratories Valuation – August 2016 $ABT
Johnson & Johnson Valuation – August 2016 $JNJ
Regeneron Pharmaceuticals Inc Valuation – August 2016 $REGN
AmerisourceBergen Corp Valuation – July 2016 $ABC
Perrigo Co PLC Valuation – July 2016 $PRGO
AbbVie Inc Valuation – July 2016 $ABBV
http://www.moderngraham.com/2016/07/20/abbvie-inc-valuation-july-2016-abbv/

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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