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Merck’s Valuation on June 28, 2017

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Jun. 30 2017, Updated 10:39 a.m. ET

A look at Merck & Co.

Merck & Co. (MRK) is one of the oldest and largest pharmaceutical companies by revenue, with headquarters in New Jersey. The company reported revenues of ~$9.4 billion during 1Q17.

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Forward PE

We believe that the forward PE and EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] multiples are two of the best valuation multiples to use when valuing Merck & Co. 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 June 28, 2017, the company was trading at a forward PE multiple of ~16.3x. The industry currently trades at a forward PE multiple of ~15.0x. 

Among Merck’s competitors, Novartis (NVS), Eli Lilly & Co. (LLY), and Pfizer (PFE) have forward PE multiples of 17.3x, 19.6x, and 12.8x, respectively.

EV-to-EBITDA

On a capital structure–neutral basis, Merck currently trades at ~10.7x. This is much lower than the industry average of ~10.8x. 

Among Merck’s competitors, Novartis (NVS), Eli Lilly & Co. (LLY), and Pfizer (PFE) have forward EV-to-EBITDA multiples of 16.8x, 14.6x, and 10.3x, respectively.

Analysts’ recommendations

Merck’s (MRK) stock price has increased nearly 18.5% over the last 12 months. Analysts estimate that the stock has the potential to return 5.8% over the next 12 months. Wall Street analysts’ recommendations show a 12-month targeted price of $69.35 per share, compared to the last price of $65.54 per share on June 27, 2017. 

Of the 22 analysts covering Merck, 14 analysts recommended a “buy”, seven analysts recommended a “hold,” and one analyst recommended a “sell.” The consensus rating on the Merck stock is ~2.3, which represents a moderate buy for long-term investors and value investors.

For broad-based industry exposure, investors can consider the iShares US Healthcare ETF (IYH), which holds 6.2% of its total assets in Merck.

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