Merck & Co., Inc. (NYSE:MRK) March 16, 2015

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Implied Price
UNDERVALUED
52.49 63.62
A Price as of Close Mar 13 56.20 USD
B CapitalCube Median Implied Price 60.80 USD * CapitalCube Price is over trading range * CapitalCube Price is below trading range
CapitalCube Estimate Range 59.03 - 62.57 USD NA
52 Week Range 52.49 - 63.62 USD
Earnings Momentum Score
 0  100
A Earnings Score (MRK) 50.74
B Earnings Score(Peer Median) 23.53
Latest Filing date December 31, 2014
Fundamental Score
 0  100
A Fundamental Score (MRK) 59
B Fundamental Score(Peer Median) 53
Dividend Score
 0  100
A Dividend Quality Score (MRK) 58
B Dividend Quality Score (Peer Median) 58
Dividend Yield
1.92 5.60
A Dividend Yield (MRK) 3.95
B Dividend Yield (Peer Median) 2.82
Analysis
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Fundamental Analysis

Capital Investment Strategy The company's capital investment program suggests it is under-investing in a business that is producing peer median returns.

The company's capital investment program suggests it is under-investing in a business that is producing peer median returns.

Earnings Leverage Compared with its chosen peers, changes in the company's annual earnings are better than the changes in its revenue, implying better than median cost control and/or some economies of scale.

Compared with its chosen peers, changes in the company's annual earnings are better than the changes in its revenue, implying better than median cost control and/or some economies of scale.

Leverage & Liquidity MRK-US has the financial and operating capacity to borrow quickly. Quick and Able

Quick and Able: Companies that have significant debt capacity with D/EV less than a 25% threshold and interest coverage greater than a 2.5x threshold, suggests ability to increase debt leverage.
MRK-US has the financial and operating capacity to borrow quickly.

Relative Valuation Merck & Co., Inc.'s current Price/Book of 3.27 is about median in its peer group.

Merck & Co., Inc.'s current Price/Book of 3.27 is about median in its peer group.

Valuation Drivers We classify MRK-US as Harvesting because of the market's relatively low growth expectations despite its relatively high returns. Harvesting

Harvesting: Companies with higher Operating Advantages (ROE) but lower Growth Advantages (P/E) usually suggests a focus on current operating results at the expense of long-term opportunities, so they are "Harvesting" out profits.
We classify MRK-US as Harvesting because of the market's relatively low growth expectations despite its relatively high returns.

Drivers of Margin The company's relatively high pre-tax margin suggests tight control on operating costs versus peers.

The company's relatively high pre-tax margin suggests tight control on operating costs versus peers.

Growth Expectations While MRK-US's revenues growth in recent years has been around the peer median, the stock's below peer median PE ratio suggests that the market likely sees the company's long-term growth prospects to be fading.

While MRK-US's revenues growth in recent years has been around the peer median, the stock's below peer median PE ratio suggests that the market likely sees the company's long-term growth prospects to be fading.

Operations Diagnostic MRK-US has relatively high profit margins while operating with median asset turns.

MRK-US has relatively high profit margins while operating with median asset turns.

Sustainability of Returns Over the last five years, MRK-US's return on assets has improved from below median to better than the median among its peers, suggesting that the company has improved its relative operations markedly. Improving

Improving: Companies whose Return on Assets (relative to the peer median) have outperformed over the last year but underperformed over the last 5 years (on average). For financials and insurance companies, we use Return on Equity.
Over the last five years, MRK-US's return on assets has improved from below median to better than the median among its peers, suggesting that the company has improved its relative operations markedly.

Likely Corporate Actions

Dividend Action

While MRK-US has a strong cash cushion, its dividend quality is low. In addition, its relative operating performance is not strong enough to suggest an increase in the dividend.

Equity Action

The company's current share price is not sufficiently lower than its 52-week high (currently about 11.66% below) and does not justify a share buyback as the best use of cash at this time.

M&A Action Acquirer

Acquirer: The company could potentially acquire other companies because of its current size, valuation and capacity to absorb acquisitions. For more information, please refer to the Corporate Actions report.
MRK-US is one of the larger companies in this peer group and thus difficult to acquire.

Dividend Quality

Dividend Coverage Strong

The ending cash balance, with a dividend coverage of 3.00x, provides a substantial cushion in case of a significant reduction of cash flows in the future.

Dividend Quality Low Quality

Low Quality: The dividend is referred to as low quality if the operating, investing and issuance cash flows are not sufficient to fund the dividend and require the company to dip into its beginning cash balance. For more information, please refer to the Corporate Actions report.
Over the last twelve months (prior to December 31, 2014), MRK-US paid a low quality dividend, which represents a yield of 3.15% at the current price.

Dividend Quality Trend

Dividend quality trend has not been consistent over the last five years. Dividends were paid during each of these years -- of these 3 were high quality, 1 was medium quality and 1 was low quality.

Accounting Red Flags

Accounting Quality Aggressive Accounting

Aggressive Accounting: Company's Net Income margin is higher than peer median while the percentage of Accruals is lower than peer median. Usually indicative of a Company with an aggressive accounting policy.
MRK-US's relatively strong net income margin for the last twelve months combined with relatively low accruals suggest possible aggressive accounting and an overstatement of its reported net income.

Management of Reserves Strong Drain

Strong Drain: Company's percentage of Accruals is below zero and lower than peer median -- usually indicative of a Company draining its Reserves in a strong manner relative to peers.
The company's accrual levels over the last twelve months are both negative and less than the peer median, which suggests that not only is the company draining reserves but is doing so more strongly compared to its peers.

Material Categories

Excluding the effects of change in revenue, the accounting categories causing the most impact on the movement of net income from the prior period to the current period are Business Combination Reserves, Intangible Assets and Tax Rates.
Characteristics
Key Valuation Items

Price to Book (P/B)

3.27

Price to Earnings (P/E)

13.38

Price to Sales

3.78

Price / EBITDA

10.04

Price to Assets

1.62

Price / FCF

24.38

EV / EBITDA

10.51

EV / FCF

25.52

Dividend Yield

3.95

PEG Ratio

0.07
Profitability

Gross Margin

79.59

EBIT Margin

21.78

Net Margin

28.25

FCF Margin

15.51

Operating Margin

21.78

Pre-Tax Margin

40.96

ROE

23.58

ROIC

16.46

ROA

11.69
Efficiency

Debt / Equity

43.87

Debt / Market

13.28

Debt / Book

Debt / EV

12.82

Coverage Ratio

25.98

Interest Coverage

12.54

Cash Days

143.80

Working Cap. Days

139.37

Receivable Days

59.24

Payable Days

21.19

Inventory Days

51.02

Sales / Assets

0.41
Growth

Earnings Growth YOY

170.66

Revenue Growth YOY

-4.28

Oper. CF Growth YOY

-32.56

EPS Growth YOY

180.82

FCF Growth YOY

-35.26
Price History

Peers

FA Score

DQ Score

close

52 week range

56.20

52.49

63.62

USD

34.00

27.51

34.97

USD

99.21

92.46

109.49

USD

69.89

56.81

75.10

USD

47.07

43.57

57.42

USD

263.95

257.20

320.50

USD

97.04

80.64

103.50

USD

46.88

36.65

47.88

USD

Company Profile

Merck & Co., Inc. provides various health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products worldwide. It is a global research-driven pharmaceutical company that discovers, develops, manufactures and markets vaccines and medicines to address unmet medical needs. The company's products cover a broad range of areas, including heart and respiratory health, infectious diseases, sun care and women's health. It provides various health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products. The company operates its business through four operating segments: Pharmaceutical, Animal Health, Consumer Care and Alliances. The Pharmaceutical segment includes human health pharmaceutical and vaccine products marketed either directly by the company or through joint ventures. Its human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. The company sells these products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers, such as health maintenance organizations, pharmacy benefit managers and other institutions. Its vaccine products consist of preventive pediatric, adolescent and adult vaccines, primarily administered at physician offices. The company sells these vaccines primarily to physicians, wholesalers, physician distributors and government entities. The Animal Health segment discovers, develops, manufactures and markets animal health products, including vaccines, which it sells to veterinarians, distributors and animal producers. The Consumer Care segment develops, manufactures and markets over-the-counter, foot care and sun care products, which are sold through wholesale and retail drug, food chain and mass merchandiser outlets in the United States and Canada. The Alliances segment includes revenue from the company relationship with AstraZeneca LP. The company was founded in 1851 and is headquartered in Whitehouse Station, NJ.

Closing Stock Price

USD 56.2

As of Date

March 13, 2015

One Year Performance

0.734901%

One Month Performance

-4.43802%

Industry Group

Pharmaceuticals: Major

52 wk. Range

USD 52.49 - USD 63.62

Market Cap (Millions)

USD 159506

Total Shares Outstanding

2838.140196
Latest Filing Dates

Annual

December 31, 2014

Semi Annual

N/A

Quarterly

December 31, 2014

Next Release Date

May 5, 2015

Filing Currency

USD

Listed Exchange

NYSE
Peers


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Closing Stock Price

USD 56.2

As of Date

March 13, 2015

One Year Performance

0.73%

One Month Performance

-4.44%

Industry Group

Pharmaceuticals: Major

52 wk. Range

USD 52.49 - USD 63.62

Market Cap (Millions)

USD 159,506

Total Shares Outstanding (Millions)

2,838.14
Latest Filing Dates

Annual

December 31, 2014

Semi Annual

N/A

Quarterly

December 31, 2014

Next Release Date

May 5, 2015

Filing Currency

USD

Listed Exchange

NYSE
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