Merck & Co.’s valuation
Merck & Co. (MRK) is a leading pharmaceutical company dealing in human pharmaceuticals as well as animal health products.
The above chart shows revenues and EPS (earnings per share) for Merck over the past eight quarters. For 3Q17, Merck surpassed Wall Street analysts’ estimates for EPS but missed the revenue estimate. Merck reported EPS of $1.11 on revenues of $10.3 billion. Wall Street analysts are estimating EPS of $0.93 on revenues of $10.5 billion in 4Q17. Let’s look next at Merck’s valuation multiples compared to its competitors.
PE (price-to-earnings) multiples represent what one share can buy for an equity investor. On January 17, 2018, Merck was trading at a forward PE multiple of ~15.0x, while the industry was trading at a forward PE multiple of 15.4x. Competitors Eli Lilly (LLY), Bristol-Myers Squibb (BMY), and Johnson & Johnson (JNJ) were trading at higher forward PE multiples of 18.2x, 18.2x, and 18.5x, respectively.
On a capital structure neutral basis, Merck was trading at a forward EV-to-EBITDA (enterprise value to earnings before tax, interest, depreciation, and amortization) multiple of ~11.5x on January 17, 2018. That’s much lower than the industry average of ~12.8x. Competitors Eli Lilly (LLY), Bristol-Myers Squibb (BMY), and Johnson & Johnson (JNJ) are trading at higher forward EV-to-EBITDA multiples of 13.8x, 15.4x, and 13.5x, respectively.
The iShares US Pharmaceuticals ETF (IHE) holds 7.4% of its total investments in Merck & Co. (MRK). It also holds 5.7% in Eli Lilly (LLY), 6.2% in Bristol-Myers Squibb (BMY), and 10.2% in Johnson & Johnson (JNJ).