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Understanding Merck’s Valuation after 2Q17

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Sep. 8 2017, Updated 7:38 a.m. ET

Merck’s valuation

Merck (MRK) is one of the oldest and largest pharmaceutical companies by revenue and has its headquarters in New Jersey.

It reported EPS of $1.01 on revenues of ~$9.93 billion for 2Q17, which represents 1% growth, compared with its EPS of $0.93 on revenues of $9.84 billion in 2Q16. 

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Forward PE ratio

PE (price-to-earnings) multiples represent what one share of a stock can buy for an equity investor. On September 6, 2017, Merck was trading at a forward PE multiple of ~15.5x. The industry currently trades at a forward PE multiple of ~13.4x.

By comparison, Novartis (NVS), Eli Lilly (LLY), and Pfizer (PFE) have forward PE multiples of 16.4x, 18.1x, and 12.6x, respectively.

EV-to-EBITDA multiple

On a capital-structure-neutral basis, Merck currently trades at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of ~11.7x, compared with the industry average of ~10.7x.

By comparison, Novartis (NVS), Eli Lilly (LLY), and Pfizer (PFE) have forward EV-to-EBITDA multiples of 15.8x, 13.5x, and 10.3x, respectively.

Analyst recommendations

Merck’s stock price has risen ~1.0% over the past 12 months, and analysts estimate that the stock has the potential to return 9.6% over the next 12 months. The Wall Street analyst recommendations show a 12-month target price of $69.74 per share for MRK, compared with its last price of $63.62 per share on September 5, 2017.

Of the 21 analysts tracking Merck, 13 analysts recommend a “buy,” while seven recommend a “hold” for the stock, and one recommends a “sell.” The consensus rating on the stock is 2.33, which represents a moderate “buy” for both long-term investors and value investors.

To divest company-specific risks, investors can consider ETFs like the iShares US Healthcare ETF (IYH), which has 5.4% of its total assets in Merck (MRK). IYH also has 2.4% in Eli Lilly (LLY) and 6.3% in Pfizer (PFE).

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