Friday 20 June 2014

Analysis of Merck 2014

Merck, a German biopharmaceutical and chemical company

Company: Merck

Business: A German biopharmaceutical and chemical company. It is currently operated as four divisions: Merck Serono (56% of revenue, biopharmaceuticals that focus on cancer, MS, infertility and cardiovascular diseases), Consumer Health (4% of sales, over the counter drug example of brands: Bion, Seven Seas and Kytta), Performance Materials (15% of sales, high-tech chemicals such as liquid crystals for electronics, plastics etc.) and finally Merck Millipore (25% of revenue, supply tools within the life science field).

Active: Product sales in over 150 countries with research hubs on three continents.

P/E: 23.2 (Updated P/E due to a mistake in quantity of share)

Here you can find the previous analysis of Merck. This is the updated analysis of 2014 based on the comment as can be seen below. I had made a huge mistake in the quantity of theoretical shares (only 30% of shares are traded since the Merck family owns the rest) which completely changes the analysis of Merck.

The P/E of Merck is too high for me with 23.2 and the P/B is also far too high with 2.5 and this means that Graham turns it down. The earnings to sales are great with 11% and the ROE has jumped up significantly to 10.9 which is a good jump up but the ROE value as such is still not good. The book to debt ratio is at 1.1 which is also very good. In the last six years Merck have had a yearly growth rate of 6.8% which is excellent and this then gives us a motivated P/E of around 19 to 22 which means that Merck is fairly valued on the market today. They spend a lot of money on R&D and so much that it even represents 125% of their earnings. Most of that is spent on the biopharmaceuticals which also represents their biggest division. They pay a tiny dividend of 1.5% which represents 34% of their earnings so there is still room to increase it and they have been increasing it for at least the last five years.

Conclusion: Graham turns it down and now after the update which was made due to careful reader that gave me the heads up on this huge mistake from me also I turn down Merck. The P/E is too high even though it fits to their high growth rate, the P/B is also a little high, the ROE is too low and the dividend also. So no Merck investment for me!

If this analysis is outdated then you can request a new one.


Anonymous said...

I see that you are only counting the authorized shares in Merck. The general partner's equity is not represented by those shares. To get an accurate picture of the financials, I think that you need to use the theoretical number of shares, which is 217388939. You can get this number from Merck's Stock Info page.

Fredrik von Oberhausen said...

Thank you for the heads up on this huge mistake that I made concerning the quantity of stocks!

The entire analysis have now been updated accordingly and I am very grateful that I could change it so quickly.

If anyone see mistakes like this then please do like Anonymous here and write a quick comment so that I can make the correction asap.

I am sorry for the mistake.