Stock Analysis: Decent Value Stocks

Fundamental Rating

We assign a fundamental rating of 7 out of 10 to MRK. MRK was compared to 198 industry peers in the Pharmaceuticals industry. MRK scores excellent points on both the profitability and health parts. This is a solid base for a good stock. A decent growth rate in combination with a cheap valuation! Better keep an eye on MRK. Finally MRK also has an excellent dividend rating. These ratings could make MRK a good candidate for value and dividend and quality investing.

1. Profitability

1.1 Basic Checks

In the past year MRK was profitable.

In the past year MRK had a positive cash flow from operations.

MRK had positive earnings in each of the past 5 years.

MRK had a positive operating cash flow in each of the past 5 years.

1.2 Ratios

With an excellent Return On Assets value of 14.62%, MRK belongs to the best of the industry, outperforming 96.46% of the companies in the same industry.

With an excellent Return On Equity value of 36.96%, MRK belongs to the best of the industry, outperforming 96.46% of the companies in the same industry.

MRK's Return On Invested Capital of 19.77% is amongst the best of the industry. MRK outperforms 93.94% of its industry peers.

The Average Return On Invested Capital over the past 3 years for MRK is significantly below the industry average of 41.67%.

		Industry Rank	Sector Rank
ROA	14.62%
ROE	36.96%
ROIC	19.77%

ROA(3y)9.42%

ROA(5y)9.66%

ROE(3y)23.17%

ROE(5y)26.32%

ROIC(3y)20.13%

ROIC(5y)17.77%

1.3 Margins

MRK's Profit Margin of 26.68% is amongst the best of the industry. MRK outperforms 95.96% of its industry peers.

MRK's Profit Margin has been stable in the last couple of years.

MRK has a Operating Margin of 34.59%. This is amongst the best in the industry. MRK outperforms 95.45% of its industry peers.

In the last couple of years the Operating Margin of MRK has grown nicely.

MRK has a better Gross Margin (78.19%) than 84.85% of its industry peers.

MRK's Gross Margin has improved in the last couple of years.

		Industry Rank	Sector Rank
OM	34.59%
PM (TTM)	26.68%
GM	78.19%

OM growth 3Y4.43%

OM growth 5Y7.18%

PM growth 3Y-0.15%

PM growth 5Y1.18%

GM growth 3Y3.55%

GM growth 5Y2.42%

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ROA

ROE

ROIC

Operating and Profit Margin

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2. Health

2.1 Basic Checks

MRK has a Return on Invested Capital (ROIC), which is well above the Cost of Capital (WACC), which means it is creating value.

MRK has about the same amout of shares outstanding than it did 1 year ago.

MRK has less shares outstanding than it did 5 years ago.

The debt/assets ratio for MRK has been reduced compared to a year ago.

2.2 Solvency

An Altman-Z score of 3.81 indicates that MRK is not in any danger for bankruptcy at the moment.

With a decent Altman-Z score value of 3.81, MRK is doing good in the industry, outperforming 78.28% of the companies in the same industry.

The Debt to FCF ratio of MRK is 2.05, which is a good value as it means it would take MRK, 2.05 years of fcf income to pay off all of its debts.

The Debt to FCF ratio of MRK (2.05) is better than 93.43% of its industry peers.

A Debt/Equity ratio of 0.74 indicates that MRK is somewhat dependend on debt financing.

Looking at the Debt to Equity ratio, with a value of 0.74, MRK is doing worse than 67.17% of the companies in the same industry.

Although MRK does not score too well on debt/equity it has very limited outstanding debt, which is well covered by the FCF. We will not put too much weight on the debt/equity number as it may be because of low equity, which could be a consequence of a share buyback program for instance. This needs to be investigated.

		Industry Rank	Sector Rank
Debt/Equity	0.74
Debt/FCF	2.05
Altman-Z	3.81

ROIC/WACC2.14

WACC9.25%

2.3 Liquidity

A Current Ratio of 1.36 indicates that MRK should not have too much problems paying its short term obligations.

MRK's Current ratio of 1.36 is on the low side compared to the rest of the industry. MRK is outperformed by 76.77% of its industry peers.

MRK has a Quick Ratio of 1.15. This is a normal value and indicates that MRK is financially healthy and should not expect problems in meeting its short term obligations.

MRK's Quick ratio of 1.15 is on the low side compared to the rest of the industry. MRK is outperformed by 72.73% of its industry peers.

The current and quick ratio evaluation for MRK is rather negative, while it does have excellent solvency and profitability. These ratios do not necessarly indicate liquidity issues and need to be evaluated against the specifics of the business.

		Industry Rank	Sector Rank
Current Ratio	1.36
Quick Ratio	1.15

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WACC

Debt/Equity

How to determine the health of a company

Altman-Z score

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3. Growth

3.1 Past

MRK shows a strong growth in Earnings Per Share. In the last year, the EPS has been growing by 258.99%, which is quite impressive.

Measured over the past years, MRK shows a quite strong growth in Earnings Per Share. The EPS has been growing by 8.04% on average per year.

Looking at the last year, MRK shows a small growth in Revenue. The Revenue has grown by 4.10% in the last year.

Measured over the past years, MRK shows a quite strong growth in Revenue. The Revenue has been growing by 10.40% on average per year.

EPS 1Y (TTM)258.99%

EPS 3Y6.87%

EPS 5Y8.04%

EPS Q2Q%7.25%

Revenue 1Y (TTM)4.1%

Revenue growth 3Y9.63%

Revenue growth 5Y10.4%

Sales Q2Q%-1.56%

3.2 Future

The Earnings Per Share is expected to grow by 6.16% on average over the next years.

MRK is expected to show a small growth in Revenue. In the coming years, the Revenue will grow by 2.43% yearly.

EPS Next Y18.6%

EPS Next 2Y14.32%

EPS Next 3Y13.3%

EPS Next 5Y6.16%

Revenue Next Year1.56%

Revenue Next 2Y3.93%

Revenue Next 3Y4.56%

Revenue Next 5Y2.43%

3.3 Evolution

When comparing the EPS growth rate of the last years to the growth rate of the upcoming years, we see that the growth is decreasing.

When comparing the Revenue growth rate of the last years to the growth rate of the upcoming years, we see that the growth is decreasing.

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4. Valuation

4.1 Price/Earnings Ratio

MRK is valuated reasonably with a Price/Earnings ratio of 10.68.

90.40% of the companies in the same industry are more expensive than MRK, based on the Price/Earnings ratio.

MRK is valuated cheaply when we compare the Price/Earnings ratio to 28.22, which is the current average of the S&P500 Index.

MRK is valuated reasonably with a Price/Forward Earnings ratio of 8.33.

Based on the Price/Forward Earnings ratio, MRK is valued cheaply inside the industry as 91.41% of the companies are valued more expensively.

The average S&P500 Price/Forward Earnings ratio is at 20.86. MRK is valued rather cheaply when compared to this.

		Industry Rank	Sector Rank
PE	10.68
Fwd PE	8.33

4.2 Price Multiples

Compared to the rest of the industry, the Enterprise Value to EBITDA ratio of MRK indicates a rather cheap valuation: MRK is cheaper than 85.86% of the companies listed in the same industry.

Compared to the rest of the industry, the Price/Free Cash Flow ratio of MRK indicates a rather cheap valuation: MRK is cheaper than 88.89% of the companies listed in the same industry.

		Industry Rank	Sector Rank
P/FCF	11.57
EV/EBITDA	8.7

4.3 Compensation for Growth

MRK's low PEG Ratio(NY), which compensates the Price/Earnings for growth, indicates a rather cheap valuation of the company.

MRK has an outstanding profitability rating, which may justify a higher PE ratio.

A more expensive valuation may be justified as MRK's earnings are expected to grow with 13.30% in the coming years.

PEG (NY)0.57

PEG (5Y)1.33

EPS Next 2Y14.32%

EPS Next 3Y13.3%

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5. Dividend

5.1 Amount

With a Yearly Dividend Yield of 3.89%, MRK has a reasonable but not impressive dividend return.

MRK's Dividend Yield is rather good when compared to the industry average which is at 4.20. MRK pays more dividend than 94.95% of the companies in the same industry.

Compared to an average S&P500 Dividend Yield of 2.44, MRK pays a better dividend.

		Industry Rank	Sector Rank
Dividend Yield	3.89%

5.2 History

On average, the dividend of MRK grows each year by 6.90%, which is quite nice.

MRK has been paying a dividend for at least 10 years, so it has a reliable track record.

MRK has not decreased their dividend for at least 10 years, which is a reliable track record.

Dividend Growth(5Y)6.9%

Div Incr Years13

Div Non Decr Years33

5.3 Sustainability

MRK pays out 45.80% of its income as dividend. This is a bit on the high side, but may be sustainable.

The dividend of MRK is growing, but the earnings are growing slower. This means the dividend growth is not sustainable.

DP45.8%

EPS Next 2Y14.32%

EPS Next 3Y13.3%

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New York Stock Exchange, Inc. / Health Care / Pharmaceuticals

1. Profitability

1.1 Basic Checks

1.2 Ratios

1.3 Margins

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2. Health

2.1 Basic Checks

2.2 Solvency

2.3 Liquidity

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3. Growth

3.1 Past

3.2 Future

3.3 Evolution

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4. Valuation

4.1 Price/Earnings Ratio

4.2 Price Multiples

4.3 Compensation for Growth

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5. Dividend

5.1 Amount

5.2 History

5.3 Sustainability

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