We believe forward PE and EV-to-EBITDA multiples are two of the best valuation multiples to use when valuing Merck & Co. (MRK) and other large pharmaceutical companies, given the relatively stable and visible nature of their earnings.
PE multiples are widely available and represent what one share can buy for an equity investor. On February 20, 2017, the company was trading at a forward PE multiple of ~16.9x. Based on the last five years’ multiple range, Merck & Co.’s current valuation is neither high nor low. Over the last five years, Merck & Co.’s PE multiple has ranged from ~7.8x to ~18x.
Merck & Co.’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, MRK could be affected. The industry currently trades at a forward PE multiple of ~16.8x. Competitors Johnson & Johnson (JNJ), Pfizer (PFE), and Eli Lilly & Co. (LLY) have forward PE multiples of 16.8x, 13.0x, and 19.4x, respectively.
On a capital structure–neutral basis, Merck & Co. (MRK) currently trades at ~10.2x. This is much lower than the industry’s average of ~11.6x. Its competitors Johnson & Johnson (JNJ), Pfizer (PFE), and Eli Lilly & Co. (LLY) have forward EV-to-EBITDA multiples of 11.4x, 10.2x, and 14.0x, respectively.
Investors can consider the Fidelity MSCI Healthcare ETF (FHLC), which holds 5.3% of its total investments in Merck & Co., 8.8% of its total investments in Johnson & Johnson, 6.7% of its total investments in Pfizer, and 2.2% in Eli Lilly & Co.