Merck & Co., Inc. is a global health care company that delivers innovative health solutions through its prescription medicines, vaccines, biologic therapies, and animal health products. Operations comprised of two segments: Pharmaceutical (90% of total sales) and Animal Health (10%). Moreover, Warren Buffett’s Berkshire Hathaway recently took a stake in Merck. This week, I fundamentally analyze Merck’s stock. I review MRK’s operating segments, look at its key ratios, derive the intrinsic value using Discounted Cash Flow (DCF) analysis, and calculate the expected rate of return from this investment. Since this is a long video, please feel free to use the time stamps in the video if you only wish to watch certain topics.
I review various key ratios such as Revenue, Net Income, Shares outstanding, Dividends, Payout Ratio, Free Cash Flows (FCF), Financial Leverage, Current Ratio, Debt to Equity Ratio, Return on Equity (ROE), Days Sales Outstanding (DSO), Days Inventory, Payable Period, Cash Conversion Cycle, Inventory Turnover, etc.
After taking into account 2020’s free cash flow of $5,569 million figure, a 5% growth rate of FCF (growth for the next 10 years), 10% discount rate, 4% long term growth rate (growth from 10 year mark to perpetuity), 5,541 million shares outstanding, and $25,360 million of long term debt, the DCF analysis yields us an intrinsic value of $30 per share. If we drop the discount rate from 10% to 6.5%, the intrinsic value comes to $88 per share. Using the current stock price of about $77 per share, and taking into the shares outstanding and future projects of free cash flows, we get the annual expected rate of return to be 1.3% if we hold this security through 2060.
Timestamp
0:00 Introduction
0:41 Operating Segments
3:53 Key Ratios Analysis
14:36 Discounted Cash Flow Analysis / Intrinsic Value
16:39 Expected Rate of Return Calculation
18:05 Summary / Conclusion
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References:
Merck’s Website: here
Morningstar Key Ratios Link: here.
Useful Resources here.
Merck & Co., Inc., d.b.a. Merck Sharp & Dohme outside the United States and Canada, is an American multinational pharmaceutical company and one of the largest pharmaceutical companies in the world. Merck is incorporated in New Jersey.
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