Shares of Merck & Company (MRK) jumped 1.1 % during today's morning session, bringing their 52 week performance to 8.0%. The stock seems to be overvalued in terms of traditional metrics, but in this day in age, we believe that a complete stock analysis should also take into account the company's strong growth indicators and mixed market sentiment.
Merck & Co., Inc. operates as a healthcare company worldwide. The large-cap Health Care company is based in Rahway, United States and has 67,000 full time employees.
MRK Has a Higher P/E Ratio Than the Sector Average
Compared to the Health Care sector's average of 24.45, Merck & Company has a trailing twelve month price to earnings (P/E) ratio of 85.0 and an expected P/E ratio of 12.4. The P/E ratios are calculated by dividing the company's share price by its trailing 12 month of $1.22 or forward earnings per share of $8.39.
Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Merck & Company's P/E ratio is higher than its sector average of 24.45, we can deduce that the market is overvaluing the company's earnings.
Merck & Company Is Overvalued in Terms of Expected Growth
Merck & Company's PEG ratio is 3.16. This metric represents the company's earnings per share divided by its expected growth ratio, and is a useful complement to the price to earnings analysis, because it factors in growth to the valuation. A PEG ratio around or below 1 implies that the market in fairly valuing the company in terms of its growth estimates. But when the PEG ratio is higher, as in Merck & Company's case, it tells us the company is overvalued.
MRK Has an Alarming P/B Ratio
The price to book (P/B) ratio of a company is a comparison of the company's market capitalization versus its net asset, or book value. A ratio lower than 1 tells you that the equity market is undervaluing the book value of the company's assets, and ratios higher than 1 tell you that the equity markets are overvaluing the company in terms of its assets.
Of course, a company is worth much more than its assets alone, so the focus on P/B ratio is mainly to enable investors to single out undervalued securities that offer a margin of safety. Since Merck & Company's P/B ratio of 6.81 is higher than its sector average of 4.16, such a margin of safety does not exist for the stock.
MRK's Weak Cash Flow Generation Is Troubling
The table below shows that Merck & Company is not generating enough cash. A well run company will generally have cash flows that reflect the strength of its underlying business, and in Merck & Company's case, free cash flow is growing at an average rate of 0.0% with a coefficient of variability of 24304764356.5%. We can also see that cash flows from operations are evolving at a 0.0% rate, versus 0.0%:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023-02-24 | 19,095,000 | -4,388,000 | 23,483,000 | 33.65 |
| 2022-02-25 | 13,122,000 | -4,448,000 | 17,570,000 | 45.86 |
| 2021-02-25 | 7,617,000 | -4,429,000 | 12,046,000 | -1.69 |
| 2020-02-26 | 8,884,000 | -3,369,000 | 12,253,000 | -9.49 |
| 2019-02-27 | 10,922,000 | -2,615,000 | 13,537,000 | 62.33 |
| 2018-02-27 | 6,451,000 | -1,888,000 | 8,339,000 |
Merck & Company's Margins Are Strong
If you buy a stock for the long run, you want the underlying business model to be profitable. Gross margins tell you how much profit the company generates compared to the cost of revenue, which is the cost directly related to providing Merck & Company's goods and services. Operating margins, on the other hand, tell you how much of these profits the company keeps after you take overhead into account.
Merck & Company's Gross Margins
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023-02-24 | 59,283,000 | -17,411,000 | 71 | -1.39 |
| 2022-02-25 | 48,704,000 | -13,626,000 | 72 | 7.46 |
| 2021-02-25 | 41,518,000 | -13,618,000 | 67 | -2.9 |
| 2020-02-26 | 39,121,000 | -12,016,000 | 69 | 1.47 |
| 2019-02-27 | 42,294,000 | -13,509,000 | 68 | 0.0 |
| 2018-02-27 | 40,122,000 | -12,912,000 | 68 |
Merck & Company's Operating Margins
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023-02-24 | 59,283,000 | -23,590,000 | 31 | 14.81 |
| 2022-02-25 | 48,704,000 | -21,879,000 | 27 | 107.69 |
| 2021-02-25 | 41,518,000 | -22,352,000 | 13 | -35.0 |
| 2020-02-26 | 39,121,000 | -19,179,000 | 20 | -4.76 |
| 2019-02-27 | 42,294,000 | -19,854,000 | 21 | 23.53 |
| 2018-02-27 | 40,122,000 | -20,413,000 | 17 |
Merck & Company's cost of revenue is growing at a rate of -0.0% in contrast to -3.3% for operating expenses. Sales revenues, on the other hand, have experienced a 0.0% growth rate. As a result, the average gross margins growth is -0.1 and the average operating margins growth rate is 10.4, with coefficients of variability of 2.8% and 30.5% respectively.
We See Mixed Market Signals Regarding MRK
Merck & Company has an average rating of buy and target prices ranging from $135.0 to $103.0. At its current price of $103.76, the company is trading -16.5% away from its target price of $124.27. 0.6% of the company's shares are linked to short positions, and 77.6% of the shares are owned by institutional investors.
| Date Reported | Holder | Percentage | Shares | Value |
|---|---|---|---|---|
| 2023-06-30 | Vanguard Group Inc | 10% | 243,640,153 | $25,280,102,795 |
| 2023-06-30 | Blackrock Inc. | 8% | 205,650,250 | $21,338,270,379 |
| 2023-06-30 | State Street Corporation | 5% | 118,562,086 | $12,302,002,296 |
| 2023-06-30 | Wellington Management Group, LLP | 3% | 77,245,752 | $8,015,019,392 |
| 2023-06-30 | Geode Capital Management, LLC | 2% | 52,723,457 | $5,470,586,010 |
| 2023-06-30 | FMR, LLC | 2% | 38,964,646 | $4,042,971,752 |
| 2023-06-30 | Morgan Stanley | 2% | 39,167,617 | $4,064,032,023 |
| 2023-06-30 | Bank of America Corporation | 1% | 37,331,860 | $3,873,553,873 |
| 2023-06-30 | Charles Schwab Investment Management, Inc. | 1% | 30,705,009 | $3,185,951,799 |
| 2023-06-30 | Price (T.Rowe) Associates Inc | 1% | 29,390,389 | $3,049,546,825 |
