Intrinsic value of Merck&Co - MRK

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$64.55

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$64.55

 
Intrinsic value

$29.32

 
Up/down potential

-55%

 
Rating

str. sell

 
Value-price divergence* premium content

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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of MRK stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 177.5

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  0.78
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  39,807
  40,603
  41,537
  42,605
  43,803
  45,131
  46,588
  48,175
  49,892
  51,742
  53,728
  55,853
  58,119
  60,533
  63,098
  65,820
  68,704
  71,758
  74,986
  78,398
  82,000
  85,801
  89,810
  94,035
  98,486
  103,175
  108,112
  113,308
  118,775
  124,528
  130,578
Variable operating expenses, $m
 
  34,882
  35,643
  36,512
  37,488
  38,570
  39,756
  41,048
  42,447
  43,954
  45,571
  45,485
  47,331
  49,296
  51,385
  53,602
  55,951
  58,438
  61,067
  63,845
  66,779
  69,874
  73,139
  76,580
  80,205
  84,023
  88,043
  92,275
  96,728
  101,412
  106,340
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  35,053
  34,882
  35,643
  36,512
  37,488
  38,570
  39,756
  41,048
  42,447
  43,954
  45,571
  45,485
  47,331
  49,296
  51,385
  53,602
  55,951
  58,438
  61,067
  63,845
  66,779
  69,874
  73,139
  76,580
  80,205
  84,023
  88,043
  92,275
  96,728
  101,412
  106,340
Operating income, $m
  4,754
  5,721
  5,894
  6,092
  6,315
  6,561
  6,832
  7,126
  7,445
  7,788
  8,157
  10,368
  10,788
  11,236
  11,713
  12,218
  12,753
  13,320
  13,919
  14,553
  15,221
  15,927
  16,671
  17,455
  18,282
  19,152
  20,068
  21,033
  22,048
  23,115
  24,239
EBITDA, $m
  10,195
  11,107
  11,363
  11,655
  11,983
  12,346
  12,745
  13,179
  13,648
  14,155
  14,698
  15,279
  15,899
  16,559
  17,261
  18,006
  18,795
  19,630
  20,513
  21,447
  22,432
  23,472
  24,568
  25,724
  26,942
  28,225
  29,575
  30,996
  32,492
  34,066
  35,721
Interest expense (income), $m
  686
  850
  886
  931
  982
  1,040
  1,103
  1,174
  1,250
  1,332
  1,421
  1,517
  1,619
  1,728
  1,844
  1,967
  2,098
  2,236
  2,383
  2,538
  2,702
  2,876
  3,058
  3,251
  3,454
  3,668
  3,893
  4,131
  4,380
  4,643
  4,920
Earnings before tax, $m
  4,659
  4,871
  5,008
  5,162
  5,333
  5,522
  5,728
  5,953
  6,195
  6,456
  6,736
  8,851
  9,170
  9,509
  9,869
  10,251
  10,655
  11,084
  11,536
  12,014
  12,519
  13,051
  13,613
  14,204
  14,828
  15,484
  16,175
  16,902
  17,667
  18,472
  19,319
Tax expense, $m
  718
  1,315
  1,352
  1,394
  1,440
  1,491
  1,547
  1,607
  1,673
  1,743
  1,819
  2,390
  2,476
  2,567
  2,665
  2,768
  2,877
  2,993
  3,115
  3,244
  3,380
  3,524
  3,675
  3,835
  4,003
  4,181
  4,367
  4,564
  4,770
  4,988
  5,216
Net income, $m
  3,920
  3,556
  3,656
  3,768
  3,893
  4,031
  4,182
  4,345
  4,523
  4,713
  4,917
  6,461
  6,694
  6,941
  7,204
  7,483
  7,778
  8,091
  8,421
  8,770
  9,139
  9,527
  9,937
  10,369
  10,824
  11,303
  11,808
  12,339
  12,897
  13,485
  14,103

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  14,571
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  95,377
  82,359
  84,254
  86,419
  88,850
  91,544
  94,499
  97,717
  101,201
  104,954
  108,982
  113,291
  117,889
  122,785
  127,988
  133,509
  139,360
  145,553
  152,102
  159,022
  166,329
  174,039
  182,170
  190,740
  199,770
  209,280
  219,293
  229,833
  240,924
  252,592
  264,864
Adjusted assets (=assets-cash), $m
  80,806
  82,359
  84,254
  86,419
  88,850
  91,544
  94,499
  97,717
  101,201
  104,954
  108,982
  113,291
  117,889
  122,785
  127,988
  133,509
  139,360
  145,553
  152,102
  159,022
  166,329
  174,039
  182,170
  190,740
  199,770
  209,280
  219,293
  229,833
  240,924
  252,592
  264,864
Revenue / Adjusted assets
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
  0.493
Average production assets, $m
  32,220
  32,848
  33,603
  34,467
  35,437
  36,511
  37,690
  38,973
  40,363
  41,860
  43,466
  45,185
  47,019
  48,971
  51,046
  53,248
  55,582
  58,052
  60,664
  63,424
  66,338
  69,413
  72,656
  76,074
  79,676
  83,469
  87,462
  91,666
  96,089
  100,743
  105,638
Working capital, $m
  13,410
  -609
  -623
  -639
  -657
  -677
  -699
  -723
  -748
  -776
  -806
  -838
  -872
  -908
  -946
  -987
  -1,031
  -1,076
  -1,125
  -1,176
  -1,230
  -1,287
  -1,347
  -1,411
  -1,477
  -1,548
  -1,622
  -1,700
  -1,782
  -1,868
  -1,959
Total debt, $m
  24,842
  25,310
  26,593
  28,059
  29,704
  31,528
  33,529
  35,708
  38,066
  40,607
  43,334
  46,251
  49,364
  52,678
  56,201
  59,938
  63,899
  68,092
  72,526
  77,211
  82,158
  87,377
  92,882
  98,684
  104,797
  111,236
  118,015
  125,150
  132,658
  140,558
  148,866
Total liabilities, $m
  55,289
  55,757
  57,040
  58,506
  60,151
  61,975
  63,976
  66,155
  68,513
  71,054
  73,781
  76,698
  79,811
  83,125
  86,648
  90,385
  94,346
  98,539
  102,973
  107,658
  112,605
  117,824
  123,329
  129,131
  135,244
  141,683
  148,462
  155,597
  163,105
  171,005
  179,313
Total equity, $m
  40,088
  26,602
  27,214
  27,913
  28,699
  29,569
  30,523
  31,563
  32,688
  33,900
  35,201
  36,593
  38,078
  39,659
  41,340
  43,123
  45,013
  47,014
  49,129
  51,364
  53,724
  56,215
  58,841
  61,609
  64,526
  67,597
  70,832
  74,236
  77,818
  81,587
  85,551
Total liabilities and equity, $m
  95,377
  82,359
  84,254
  86,419
  88,850
  91,544
  94,499
  97,718
  101,201
  104,954
  108,982
  113,291
  117,889
  122,784
  127,988
  133,508
  139,359
  145,553
  152,102
  159,022
  166,329
  174,039
  182,170
  190,740
  199,770
  209,280
  219,294
  229,833
  240,923
  252,592
  264,864
Debt-to-equity ratio
  0.620
  0.950
  0.980
  1.010
  1.040
  1.070
  1.100
  1.130
  1.160
  1.200
  1.230
  1.260
  1.300
  1.330
  1.360
  1.390
  1.420
  1.450
  1.480
  1.500
  1.530
  1.550
  1.580
  1.600
  1.620
  1.650
  1.670
  1.690
  1.700
  1.720
  1.740
Adjusted equity ratio
  0.316
  0.323
  0.323
  0.323
  0.323
  0.323
  0.323
  0.323
  0.323
  0.323
  0.323
  0.323
  0.323
  0.323
  0.323
  0.323
  0.323
  0.323
  0.323
  0.323
  0.323
  0.323
  0.323
  0.323
  0.323
  0.323
  0.323
  0.323
  0.323
  0.323
  0.323

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  3,920
  3,556
  3,656
  3,768
  3,893
  4,031
  4,182
  4,345
  4,523
  4,713
  4,917
  6,461
  6,694
  6,941
  7,204
  7,483
  7,778
  8,091
  8,421
  8,770
  9,139
  9,527
  9,937
  10,369
  10,824
  11,303
  11,808
  12,339
  12,897
  13,485
  14,103
Depreciation, amort., depletion, $m
  5,441
  5,387
  5,469
  5,563
  5,668
  5,785
  5,913
  6,052
  6,203
  6,366
  6,541
  4,911
  5,111
  5,323
  5,549
  5,788
  6,041
  6,310
  6,594
  6,894
  7,211
  7,545
  7,897
  8,269
  8,660
  9,073
  9,507
  9,964
  10,444
  10,950
  11,482
Funds from operations, $m
  7,775
  8,943
  9,125
  9,331
  9,561
  9,816
  10,095
  10,398
  10,726
  11,079
  11,458
  11,373
  11,805
  12,264
  12,753
  13,271
  13,820
  14,401
  15,015
  15,664
  16,349
  17,072
  17,835
  18,638
  19,485
  20,376
  21,315
  22,302
  23,342
  24,435
  25,585
Change in working capital, $m
  -2,601
  -12
  -14
  -16
  -18
  -20
  -22
  -24
  -26
  -28
  -30
  -32
  -34
  -36
  -38
  -41
  -43
  -46
  -48
  -51
  -54
  -57
  -60
  -63
  -67
  -70
  -74
  -78
  -82
  -86
  -91
Cash from operations, $m
  10,376
  6,066
  9,139
  9,347
  9,579
  9,835
  10,116
  10,422
  10,752
  11,107
  11,488
  11,404
  11,839
  12,300
  12,791
  13,312
  13,863
  14,447
  15,064
  15,715
  16,404
  17,129
  17,895
  18,701
  19,551
  20,446
  21,389
  22,380
  23,424
  24,521
  25,676
Maintenance CAPEX, $m
  0
  -3,502
  -3,570
  -3,653
  -3,746
  -3,852
  -3,969
  -4,097
  -4,236
  -4,387
  -4,550
  -4,725
  -4,911
  -5,111
  -5,323
  -5,549
  -5,788
  -6,041
  -6,310
  -6,594
  -6,894
  -7,211
  -7,545
  -7,897
  -8,269
  -8,660
  -9,073
  -9,507
  -9,964
  -10,444
  -10,950
New CAPEX, $m
  -1,614
  -628
  -756
  -864
  -970
  -1,074
  -1,179
  -1,284
  -1,389
  -1,497
  -1,606
  -1,719
  -1,834
  -1,953
  -2,075
  -2,202
  -2,334
  -2,470
  -2,612
  -2,760
  -2,914
  -3,075
  -3,243
  -3,418
  -3,601
  -3,793
  -3,994
  -4,204
  -4,423
  -4,654
  -4,895
Cash from investing activities, $m
  -3,210
  -4,130
  -4,326
  -4,517
  -4,716
  -4,926
  -5,148
  -5,381
  -5,625
  -5,884
  -6,156
  -6,444
  -6,745
  -7,064
  -7,398
  -7,751
  -8,122
  -8,511
  -8,922
  -9,354
  -9,808
  -10,286
  -10,788
  -11,315
  -11,870
  -12,453
  -13,067
  -13,711
  -14,387
  -15,098
  -15,845
Free cash flow, $m
  7,166
  1,935
  4,813
  4,830
  4,863
  4,909
  4,969
  5,041
  5,126
  5,223
  5,331
  4,961
  5,093
  5,237
  5,393
  5,561
  5,742
  5,935
  6,142
  6,362
  6,595
  6,844
  7,107
  7,386
  7,681
  7,993
  8,322
  8,670
  9,037
  9,423
  9,831
Issuance/(repayment) of debt, $m
  -1,307
  1,036
  1,282
  1,466
  1,646
  1,824
  2,001
  2,179
  2,358
  2,541
  2,727
  2,917
  3,113
  3,314
  3,522
  3,738
  3,961
  4,193
  4,434
  4,685
  4,947
  5,220
  5,504
  5,802
  6,113
  6,439
  6,779
  7,135
  7,508
  7,899
  8,309
Issuance/(repurchase) of shares, $m
  -2,495
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -3,920
  1,036
  1,282
  1,466
  1,646
  1,824
  2,001
  2,179
  2,358
  2,541
  2,727
  2,917
  3,113
  3,314
  3,522
  3,738
  3,961
  4,193
  4,434
  4,685
  4,947
  5,220
  5,504
  5,802
  6,113
  6,439
  6,779
  7,135
  7,508
  7,899
  8,309
Total cash flow (excl. dividends), $m
  3,115
  2,972
  6,095
  6,296
  6,509
  6,733
  6,970
  7,220
  7,485
  7,764
  8,058
  7,879
  8,206
  8,552
  8,916
  9,299
  9,703
  10,128
  10,576
  11,047
  11,542
  12,063
  12,612
  13,188
  13,794
  14,431
  15,101
  15,805
  16,545
  17,323
  18,140
Retained Cash Flow (-), $m
  4,588
  -517
  -612
  -699
  -785
  -870
  -955
  -1,040
  -1,125
  -1,212
  -1,301
  -1,392
  -1,485
  -1,581
  -1,681
  -1,783
  -1,890
  -2,000
  -2,115
  -2,235
  -2,360
  -2,490
  -2,626
  -2,768
  -2,917
  -3,072
  -3,234
  -3,404
  -3,582
  -3,769
  -3,964
Prev. year cash balance distribution, $m
 
  14,003
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  16,458
  5,483
  5,597
  5,723
  5,863
  6,015
  6,181
  6,359
  6,551
  6,757
  6,487
  6,721
  6,970
  7,235
  7,516
  7,813
  8,128
  8,460
  8,811
  9,182
  9,573
  9,985
  10,420
  10,878
  11,360
  11,867
  12,401
  12,963
  13,554
  14,175
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  15,779
  5,020
  4,871
  4,713
  4,544
  4,366
  4,176
  3,975
  3,763
  3,543
  3,080
  2,868
  2,650
  2,429
  2,206
  1,985
  1,768
  1,558
  1,357
  1,167
  990
  829
  683
  554
  442
  346
  266
  201
  148
  107
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Merck & Co., Inc. provides healthcare solutions worldwide. The company offers therapeutic and preventive agents to treat cardiovascular, type 2 diabetes, asthma, nasal allergy symptoms, allergic rhinitis, chronic hepatitis C virus, HIV-1 infection, fungal infections, intra-abdominal infections, hypertension, arthritis and pain, inflammatory, osteoporosis, male pattern hair loss, and fertility diseases. It also offers neuromuscular blocking agents; anti-bacterial products; cholesterol modifying medicines; non-sedating antihistamine; and vaginal contraceptive products. In addition, the company offers products to prevent chemotherapy-induced and post-operative nausea and vomiting; treat brain tumors; treat melanoma and metastatic non-small-cell lung cancer; prevent diseases caused by human papillomavirus; and vaccines for measles, mumps, rubella, varicella, chickenpox, shingles, rotavirus gastroenteritis, and pneumococcal diseases. Further, it offers antibiotic and anti-inflammatory drugs to treat infectious and respiratory diseases, fertility disorders, and pneumonia in cattle, horses, and swine; vaccines for poultry; parasiticide for sea lice in salmon; and antibiotics and vaccines for fishes. Additionally, the company offers companion animal products, such as ointments for otitis; diabetes mellitus treatment for dogs and cats; anthelmintic products; chewable tablets to treat fleas and ticks in dogs; and products for protection against bites from fleas, ticks, mosquitoes, and sandflies. It serves drug wholesalers and retailers, hospitals, government agencies and entities, physicians, physician distributors, veterinarians, distributors, animal producers, and managed health care providers. The company has collaboration agreements with Adaptimmune Therapeutics plc and Agenus; and a research agreement with Proteros Biostructures to develop molecule compounds for various cancer treatments. The company was founded in 1891 and is headquartered in Kenilworth, New Jersey.

FINANCIAL RATIOS  of  Merck&Co (MRK)

Valuation Ratios
P/E Ratio 45.3
Price to Sales 4.5
Price to Book 4.4
Price to Tangible Book
Price to Cash Flow 17.1
Price to Free Cash Flow 20.3
Growth Rates
Sales Growth Rate 0.8%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 25.8%
Cap. Spend. - 3 Yr. Gr. Rate 0.8%
Financial Strength
Quick Ratio 26
Current Ratio 0.2
LT Debt to Equity 60.6%
Total Debt to Equity 62%
Interest Coverage 8
Management Effectiveness
Return On Assets 4.6%
Ret/ On Assets - 3 Yr. Avg. 7.3%
Return On Total Capital 5.8%
Ret/ On T. Cap. - 3 Yr. Avg. 9.5%
Return On Equity 9.2%
Return On Equity - 3 Yr. Avg. 14.3%
Asset Turnover 0.4
Profitability Ratios
Gross Margin 75.7%
Gross Margin - 3 Yr. Avg. 74.9%
EBITDA Margin 27.1%
EBITDA Margin - 3 Yr. Avg. 39.1%
Operating Margin 11.9%
Oper. Margin - 3 Yr. Avg. 21.9%
Pre-Tax Margin 11.7%
Pre-Tax Margin - 3 Yr. Avg. 22.1%
Net Profit Margin 9.8%
Net Profit Margin - 3 Yr. Avg. 16.4%
Effective Tax Rate 15.4%
Eff/ Tax Rate - 3 Yr. Avg. 21.3%
Payout Ratio 130.7%

MRK stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the MRK stock intrinsic value calculation we used $39807 million for the last fiscal year's total revenue generated by Merck&Co. The default revenue input number comes from 2016 income statement of Merck&Co. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our MRK stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for MRK is calculated based on our internal credit rating of Merck&Co, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Merck&Co.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of MRK stock the variable cost ratio is equal to 86%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for MRK stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Merck&Co.

Corporate tax rate of 27% is the nominal tax rate for Merck&Co. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the MRK stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for MRK are equal to 80.9%.

Life of production assets of 9.2 years is the average useful life of capital assets used in Merck&Co operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for MRK is equal to -1.5%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $40088 million for Merck&Co - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 2749.45 million for Merck&Co is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Merck&Co at the current share price and the inputted number of shares is $177.5 billion.


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COMPANY NEWS

▶ Performance of Mercks Diabetes Portfolio in 1Q17   [May-24-17 10:36AM  Market Realist]
▶ Gardasil and Mercks Vaccines Business in 1Q17   [09:06AM  Market Realist]
▶ FDA Approves Merck's Keytruda to Treat Cancers With Genetic Defects   [May-23-17 06:20PM  The Wall Street Journal]
▶ Merck Announces Third-Quarter 2017 Dividend   [01:19PM  Business Wire]
▶ Merck & Co.s Segmental Performance in 1Q17   [11:35AM  Market Realist]
▶ Why Merck & Co. Continued to Grow in 1Q17   [10:05AM  Market Realist]
▶ Dow Jones Industrial Average And Dow Stocks: News And Analysis   [May-22-17 04:47PM  Investor's Business Daily]
▶ ETFs with exposure to Merck & Co., Inc. : May 19, 2017   [May-19-17 02:01PM  Capital Cube]
▶ 100 Healthy Years - Are Kids Prepared?   [04:00AM  PR Newswire]
▶ US Market Indexes Higher on Thursday   [May-18-17 06:21PM  GuruFocus.com]
▶ The Hot Stock: Incyte Climbs   [04:50PM  Barrons.com]
▶ What to watch at ASCO cancer conference   [06:21AM  CNBC Videos]
▶ Merck KGaA CFO Believes in Value Based Pricing   [03:39AM  Bloomberg Video]
▶ Eli Lilly: Worries Ahead In Patent Fight   [12:39PM  Barrons.com]
▶ Eli Lilly: Has This Bloom Begun To Wilt?   [12:17PM  Barrons.com]
▶ Nasdaq Closes at 6121, Stocks Mostly Lower   [May-12-17 06:04PM  GuruFocus.com]
▶ Johnson & Johnson Analyst Day   [05:00PM  Yahoo Finance Video]
▶ Merck Can't Say How Good its Good News Is   [May-11-17 03:13PM  Bloomberg]
▶ FDA Approves Combining Merck's Keytruda With Chemotherapy   [May-10-17 06:52PM  The Wall Street Journal]
▶ Short Interest in Major Pharma Shrinks   [09:00AM  24/7 Wall St.]
▶ J&J: What's In Store At Next Week's Analyst Meeting   [May-08-17 09:34AM  Barrons.com]
▶ Stocks Lower With Disappointing Earnings From Apple   [May-03-17 07:21PM  GuruFocus.com]
▶ [$$] High Stakes in Big Pharmas Latest Cancer Race   [12:29AM  The Wall Street Journal]
▶ Merck's Year May Hinge on the Next Eight Days   [May-02-17 03:07PM  Bloomberg]
▶ [$$] High Stakes in Big Pharma's Latest Cancer Race   [11:43AM  The Wall Street Journal]
Stock chart of MRK Financial statements of MRK Annual reports of MRK
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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