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 down 5.47%.
Source: Google Finance
Inputs
- Discount Rate: 6%
- Terminal Growth Rate: 2%
- WACC: 6%
Forecasted Free Cash Flows (FCFs)
| Year | FCF (billions) | PV(billions) |
| 2024 | 12.19 | 11.50 |
| 2025 | 13.08 | 11.64 |
| 2026 | 14.03 | 11.78 |
| 2027 | 15.05 | 11.92 |
| 2028 | 16.14 | 12.06 |
Terminal Value
Terminal Value = FCF * (1 + g) / (r – g) = 411.57 billion
Present Value of Terminal Value
PV of Terminal Value = Terminal Value / (1 + WACC)^5 = 307.55 billion
Present Value of Free Cash Flows
Present Value of FCFs = ∑ (FCF / (1 + r)^n) = 58.90 billion
Enterprise Value
Enterprise Value = Present Value of FCFs + Present Value of Terminal Value = 366.45 billion
Net Debt
Net Debt = Total Debt – Total Cash = 23.54 billion
Equity Value
Equity Value = Enterprise Value – Net Debt = 342.91 billion
Per-Share DCF Value
Per-Share DCF Value = Enterprise Value / Number of Shares Outstanding = $135.54
Conclusion
| DCF Value | Current Price | Margin of Safety |
|---|---|---|
| $135.54 | $101.25 | 25.30% |
Based on the DCF valuation, the stock is undervalued. The DCF value of $135.54 per share is higher than the current market price of $101.25. The Margin of Safety is 25.30%.
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