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Merck & Co.’s Valuation in November 2017

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Merck & Co.’s valuation

Headquartered in New Jersey, Merck & Co. (MRK) is one of the largest pharmaceutical companies worldwide. Its portfolio includes both human pharmaceuticals and animal health products. It reported EPS (earnings per share) of $1.11 on revenues of $10.3 billion in 3Q17, which was a 2% fall compared to EPS of $1.07 on revenues of $10.5 billion in 3Q16.

The above chart shows revenues and EPS for Merck & Co. over the last eight quarters. For 3Q17, the company missed analysts’ estimates for revenues but surpassed the EPS estimate and reported EPS of $1.11 compared to the estimate of $1.03. Let’s look now at the valuation multiples for Merck and a few of its competitors.

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Forward PE

PE (price-to-earnings) multiples represent what one share can buy for an equity investor. On November 27, 2017, Merck & Co. was trading at a forward PE multiple of ~13.4x, while the industry was trading at an average of 17.7x. Eli Lilly (LLY), Novartis (NVS), and Johnson & Johnson (JNJ) were trading at higher forward PE multiples of 18.2x, 16.3x, and 17.6x, respectively.

Forward EV-to-EBITDA

On a capital structure neutral basis, Merck & Co. was trading at a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of ~10.2x on November 27, 2017, which is much lower than the industry average of ~12.4x. Eli Lilly (LLY), Novartis (NVS), and Johnson & Johnson (JNJ) were trading at higher forward EV-to-EBITDA multiples of 13.7x, 15.3x, and 12.9x, respectively.

The iShares Core High Dividend (HDV) holds 11.6% of its total assets in healthcare companies. HDV holds 2.8% in Merck & Co. (MRK).

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