Merck & Co.’s Valuation Is Neither High nor Low: So What?



A look at Merck’s valuation

On February 17, 2016, Merck & Co. (MRK) was trading at a forward PE (price-to-earnings) multiple of ~13.6x compared with the industry average of 17.1x. Over the last year, the company’s forward PE has been in the range of 13.0x–17.0x.

Merck & Co. is trading at a higher PE than Pfizer (PFE), which trades at 12.8x, and AbbVie (ABBV), which trades at 10.7x. Competitors Eli Lilly & Co. (LLY) and Johnson & Johnson (JNJ) are trading at higher PE multiples of 20.8x and 15.6x, respectively.

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The fundamental factors affecting stock prices and valuation include the performance of growth platforms and the exclusivity of blockbuster drugs. Foreign exchange rates also play an important role in the profitability of the company and consequently affect the stock price and valuation. This series covers the segment-wise performance of products and the major drivers of this performance.

Forward PE

From an investor’s point of view, the two best valuation multiples used for valuing companies like Merck & Co. are forward PE and EV-to-EBITDA (enterprise value to earnings before interest, taxes, depreciation, and amortization) multiples, considering the relatively stable and visible nature of their earnings.

PE multiples represent what one share can buy for an equity investor. Based on the last five years’ multiple range, Merck & Co.’s current valuation is neither high nor low, and its PE multiple has ranged from 7.8x–18x. Merck’s valuation multiple has also followed the industry’s overall trend over the last five years. Whether or not the healthcare sector’s forward PE multiple rises or falls, Merck will definitely be affected.

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Forward EV-to-EBITDA

On a capital structure neutral and excess cash-adjusted basis, Merck currently trades at ~9.8x, which is much lower than the industry average of ~12.9x. Competitors such as Pfizer (PFE), AbbVie (ABBV), Eli Lilly (LLY), and Johnson & Johnson (JNJ) have forward EV-to-EBITDA multiples of 9.4x, 9.4x, 14.7x, and 10.5x, respectively.

Stock price performance

According to data from February 16, 2016, Merck’s stock price has declined by ~12.5% over the last 12 months. The VanEck Vectors Pharmaceutical ETF (PPH) fell by ~13.1% during the same period. Pfizer (PFE) fell 10.8%, Sanofi (SNY) fell 18.5%, and GlaxoSmithKline (GSK) fell 10.4%.

Analyst recommendations

Analysts estimate that Merck & Co. stock has the potential to return ~19.1% over the next 12 months. Analyst recommendations show a 12-month targeted price of $60.25 per share compared to $50.60 per share as of February 17, 2016.

About 44% of analysts recommend a “buy” and ~56% recommend a “hold,” according to Bloomberg’s consensus. Changes in analyst estimates and recommendations are based on changing trends in the stock price. For more details about Merck, you can read Merck & Co.: An American Pharmaceuticals Giant.


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