As part of a new series, each week we typically conduct a DCF on one of the companies in our screens. This week we thought we’d take a look at one of the stocks that is not currently in our screens, Merck & Co Inc (MRK).
Profile
Merck makes pharmaceutical products to treat several conditions in a number of therapeutic areas, including cardiometabolic disease, cancer, and infections. Within cancer, the firm’s immuno-oncology platform is growing as a major contributor to overall sales. The company also has a substantial vaccine business, with treatments to prevent pediatric diseases as well as human papillomavirus, or HPV. Additionally, Merck sells animal health-related drugs. From a geographical perspective, just under half of the company’s sales are generated in the United States.
Recent Performance
Over the past twelve months the share price is up 17.27%.
Source: Google Finance
Inputs
- Discount Rate: 5%
- Terminal Growth Rate: 2%
- WACC: 5%
Forecasted Free Cash Flows (FCFs)
| Year | FCF (billions) | PV(billions) |
| 2024 | 11.85 | 11.29 |
| 2025 | 12.64 | 11.46 |
| 2026 | 13.48 | 11.64 |
| 2027 | 14.38 | 11.83 |
| 2028 | 15.34 | 12.02 |
Terminal Value
Terminal Value = FCF * (1 + g) / (r – g) = 521.56 billion
Present Value of Terminal Value
PV of Terminal Value = Terminal Value / (1 + WACC)^5 = 408.66 billion
Present Value of Free Cash Flows
Present Value of FCFs = ∑ (FCF / (1 + r)^n) = 58.24 billion
Enterprise Value
Enterprise Value = Present Value of FCFs + Present Value of Terminal Value = 466.90 billion
Net Debt
Net Debt = Total Debt – Total Cash = 28.60 billion
Equity Value
Equity Value = Enterprise Value – Net Debt = 438.30 billion
Per-Share DCF Value
Per-Share DCF Value = Enterprise Value / Number of Shares Outstanding = $173.04
Conclusion
| DCF Value | Current Price | Margin of Safety |
|---|---|---|
| $173.04 | $124.25 | 28.19% |
Based on the DCF valuation, the stock is undervalued. The DCF value of $173.04 share is higher than the current market price of $124.25. The Margin of Safety is 28.19%.
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