MRK Stock – is Merck’s Stock a Good Buy in 2019 – Best Investments Series

hey YouTube I’m Jimmy in this video I’m
gonna walk through my analysis of Merck ticker symbol MRK this is a 19th video
in our series where we’re analyzing all 30 stocks in the Dow Jones Industrial
Average you can see a link to all those other videos in the description below
well once we’re done with our analysis we’re going to take all of that analysis
and we’re going to try to build three different portfolios a dividend a
value in a growth portfolio so Merck is the global healthcare company that has
prescription medicines vaccines biologic therapies and animal health care
products we’re gonna break out their business into a four main segments we’re
gonna have human health vaccines animal health and then
alliances this chart breaks out each of their segments by its contribution to
revenue and as we could see human health is by far the largest segment and that
accounts for about 73 percent of revenue vaccines is the second largest with a
bit over 15% animal health is the third right around ten percent and then
alliances is right around two percent now the Alliance segment is the smallest
and that consists of collaborations with other companies one example of this is
back in March of 2018 Merck teamed up with a company that created some
tyrosine kinase kinase kinase inhibitors and it’s supposed to be a really big
deal in the potential is something that could really help the medical industry
ultimately if that collaboration ends up generating revenue this is where it’ll
fall then we have animal health this segment discovers develops manufactures
and then sells products like vaccines and other animal health like products
they sell them to veterinarians distributors and animal breeders now the
company says that there are many synergies between the animal health
segment and the human health segment and specifically when it comes to research
and development and if we think about it that makes a
lot of sense since I would imagine I could see how those two research areas
could overlap now this is also an important point from an investing if
we’re going to value the company from an investment standpoint because one of the
techniques you can use to value a company it’s called sum of the parts
where in theory what you do is you say what does each segment worth if we spun
it off in minutes on business that wouldn’t really work in this scenario
now that we know that there’s so many synergies between those two because
without animal health and human health sort of collaborating and sharing each
other’s information and research with each other then it’s likely to slow down
both companies so that would make that type of analysis a bit weaker okay then
there’s the vaccine segment this segment is exactly what you might think they
make vaccines and they’ve actually been a pretty good source of growth for Merck
recently but we’ll get more to that in a minute
then we have the largest segment that is human health we can also probably call
this pharmaceutical drugs since that’s primarily what they do in fact in the
business section of their 10k that’s where I always start whatever I’m
tackling a new company well they have their reportable segments as
pharmaceuticals and they include human health and vaccines in there now for me
I combine I separated those two out instead of combining them because I
figured it would give us a better understanding of what potential growth
drivers we have okay so now let’s look at revenue so as we could see revenue
declined a bit from 2011 over to 2015 and then had a few small upticks in 2016
and 2017 now analysts estimates there the green
bars while analysts are expecting for revenue to approach the highs of 2011
they expect that to happen in the next few years now 2018 the estimates for
2018 that’s mostly just a fourth quarter since the first three quarters are
already in and Merck has already put up a bit over 31 billion dollars in revenue
through the first three quarters so to get to the level of estimates here Merck
only needs to put up about 11 billion dollars more in the fourth quarter which
is possible especially since fourth quarter has been a rather strong quarter
for them in recent years so now if we look a bit closer at each of the
segments one thing that we can see is human health when we add that to the
chart we could see that that’s consistently been a large driver of
overall revenue and we’ll look closer at this segment in a few minutes now I
don’t have any projections for any of those segments in order to come up with
that we’d have to build essentially a full model to try to value Merck and try
to project what businesses would look like that would take a ton of time if
you’re interested in seeing something like that let me know in the comments
below because that might make for an video I could probably use an old one
that I’ve done and just updated with new numbers and then walk everybody through
how I would build something like that either way it seems that human health
has been about flat recently now when we add vaccines we could see that vaccines
has climbed nicely in recent years now just so we’re all on the same page notice
that I added a right-hand access to this whole chart I did that so we could see
the individual lines a bit more clearly if we kept them on the same axis the
chart would look like this and its really tough to tell whether or not
there’s anything interesting happening there so for all the different segments
going forward I’m going to use the right hand axis so don’t compare those to the
first two company of two the first two lines in the chart just we’re looking
more at the trend and if we remember vaccines the second largest segment they
get about 15% of overall revenue so we can sort of compare them to each other
the three that we’re about to add now if we add animal health we could see once
again it seems to be grown quite nicely then if we add the smallest segment
alliances we can see that it’s a bit volatile but it only counts about two
percent of revenue so I’m not too concerned about what this segment is
doing now jumping back to human health for a minute because obviously this is
one of the key drivers to revenue so here’s a chart for their leading revenue
generating prescription drugs going back to 2010 and as we could see januvia is
their largest contributor to revenue januvia januvia is a diabetes medicine
and it’s actually januvia and janument ganument is actually a combination of
januvia and something called metformin so overall these products have been the
primary driver of revenue in recent years so we could see the key true that
came to market in 2014 and it’s been growing rapidly ever since in fact if we
add in those projections for these drugs we could see that they expect key
keytruda to be one of the primary drivers of revenue in the future the next few
years keytruda as a cancer drug it’s supposed
to be quite a quite a promising drug when it comes to treating lung cancer
and a few other cancer types and so that would be awesome if they could you know
figure that thing okay so what do we think Merck stock is actually worth and
should we add it to any of the portfolio’s now I think it’s important
to remember with pharmaceutical companies that getting drugs approved is
a complex and lengthy process in often it doesn’t go as management or as
analysts predict it will and 2019 is is expected to be a pretty big year for
Merck as they have many big developments in the pipeline this table this is a
table from their most recent earnings presentation and as you can see they
have many different things that they’re waiting for in 2019 and some even in
2020 now this is important because any good or bad news on any of these big
developments is likely to really make the stock move in one direction or
another so I think it’s something to consider that we might have to be ready
for additional volatility although the good news is that this type of company
tends to be fairly defensive and if the market continues to struggle it’s likely
that Merck and its competitors would do decent since it’s often a defensive play
and ultimately if a country went into a recession
Merck is likely to be not terribly affected by that
since medicine fairly is tends to be fairly defensive okay so now let’s try
to value Merck stock now p/e is tricky to use here because of the nature of
Merck’s business so much of the revenue is often driven in this type of business
by a single drug or maybe two or maybe three it’s not as simple as selling
something like Cokes or something like that if Keytruda continues to pick up
steam then perhaps Merck should be trading at a premium compared to its
peers but if bad news comes out and a clinical trial doesn’t go as they expect
well then Merck might be it might have to be trading at a discount to its peers
so I think it makes more sense for us to try to use discounted cash flow so when
we take analyst estimates for free cash flow and we go out the next few years we
can see if we get a fair value of about 82 dollars per share now the first thing
that to me that’s interesting is that this big jump in free cash flow here
when I actually saw this I started questioning analyst projections and I
started doing some digging on my own to see if this was realistic and when I
found is that through the first three quarters of 2018 Merck has already
posted up almost six billion dollars in free cash flow which makes their nine
point eight billion much more obtainable next we use a weighted average cost of
capital of about 8.5% and that may seem a bit high given the stability of
Merck’s business at least over the long term but Merck actually
very little death they get about thirty three billion dollars in long-term debt
compared to a market cap of near 190 billion it turns out that the valuation
we’re using is mostly based on the cost of equity and the cost of equity is
higher then we have a perpetual growth rate of about two point five percent
that’s been standard for us that’s what we typically use that seems like a
reasonable number to use now Merck also has a pretty good dividend with a
dividend yield of about three percent in October of 2018 marks Board of Directors
approved a fifteen percent increase in their quarterly dividend that’s up
they’ve consistently increased it by about two or three percent every year
then they fifteen percent job just recently they moved it up to fifty five
cents from forty eight cents they also entered an accelerated repurchase
program of four five billion dollars repurchases is the same as a stock
buyback so right now Merck is trading at about seventy two dollars per share our
fair value has them up there at about eighty two dollars per share so that’s
an upside of bug fourteen percent so it’s a decent one if Merck stock keeps
falling it could even become more appealing from a value perspective so I
don’t really see them and I don’t see Merck as a fit in our growth portfolio
perhaps in the value portfolio especially if keeps falling the dividend
portfolio probably makes some sense three percent is pretty good could be a
good diversifier in that portfolio but what do you think do you think we should
add it to any of the portfolio’s is it strong enough to be in our dividend
portfolio at three percent you know I’m not sure how high we’re going to target
when we go ahead and build that portfolio that being said thanks for
sticking with me all the way into the video if you haven’t done so already hit
the subscribe button let me know any thoughts or questions or ideas you have
in the comments below and thanks a lot and I’ll see in the next video

7 Replies to “MRK Stock – is Merck’s Stock a Good Buy in 2019 – Best Investments Series”

  1. I’m curious about how you were able to get to “Today’s Value” for the discounted free cash flow valuation.
    Just a video idea, but I think it would be great if you went into depth and explained the discounted free cash flow valuation.

  2. Thanks for the analysis. Biotech is beyond my circle of competence, therefore it’s always great to get some insight.

  3. I love how you packaged this in a series and you keep at it. It's really easy to follow and brings tons of value. Thanks, Jimmy!

  4. Could you do a video on some of the stock terminology ? Some of that stuff is way over my head. MRK, I'm buying that stock because it's a defensive stock and has a pretty good dividend. Thanks Jimmy

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