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Merck’s Valuation Cheat Sheet for 1Q16

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Updated

Valuation multiples

Forward PE and EV-to-EBITDA multiples are two of the best valuation multiples to use when valuing Merck & Co. (MRK) and other large pharmaceuticals companies, given the relatively stable and visible natures of their earnings.

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Forward PE

PE multiples are widely available and represent what one share can buy for an equity investor. On April 25, 2016, the company was trading at a forward PE multiple of ~15.0x. Based on the last five years’ multiple range, Merck’s current valuation is neither high nor low. Over the past five years, Merck’s PE multiple has ranged from ~7.8x to ~18x.

Merck’s valuation multiple has also followed the industry’s overall trend over the last five years. Whether the healthcare sector’s forward PE multiple rises or falls, Merck will be affected.

The industry is currently trading at a forward PE multiple of ~18.8x. Other competitors Johnson & Johnson (JNJ), Pfizer (PFE), and Eli Lilly (LLY) have forward PE multiples of 16.9x, 14.0x, and 21.1x, respectively.

Dividend yield

The dividend yield for Merck & Co. was 3.4% in 2015. It’s estimated to be 3.5% in 2016 and 3.6% in 2017. The dividend payout ratio for 2015 was 115.1%. It’s estimated to be 49.8% and 49.9% in 2016 and 2017, respectively.

Merck’s mature state has helped it to pay regular dividends. The stock could be a good option for both growth and income investors.

EV-to-EBITDA

On a capital structure–neutral basis, Merck currently trades at ~10.1x, lower than its historical average of ~10.7x and the industry’s average of ~13.6x. Other competitors Johnson & Johnson, Pfizer, and Eli Lilly have forward EV-to-EBITDA multiples of 11.5x, 10.5x, and 14.3x, respectively.

The above multiples represent improvements in estimates and valuations for Merck, which is a positive sign for investors.

Investors can consider ETFs such as the VanEck Vectors Pharmaceutical ETF (PPH), which holds ~5.4% of its total assets in Merck, or the iShares US Healthcare ETF (IYH), which holds 5.3% of its total assets in Merck, in order to divest risk.

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