Intrinsic value of Merck&Co - MRK

Previous Close

$63.88

  Intrinsic Value

$30.30

stock screener

  Rating & Target

str. sell

-53%

  Value-price divergence*

-60%

Previous close

$63.88

 
Intrinsic value

$30.30

 
Up/down potential

-53%

 
Rating

str. sell

 
Value-price divergence*

-60%

*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 174.9

 

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
  34,936
  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
  4,871
  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
  10,312
  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
  888
  933
  984
  1,042
  1,106
  1,176
  1,252
  1,335
  1,424
  1,520
  1,622
  1,731
  1,847
  1,970
  2,101
  2,240
  2,387
  2,542
  2,707
  2,880
  3,063
  3,256
  3,459
  3,673
  3,899
  4,136
  4,386
  4,649
  4,926
Earnings before tax, $m
  4,659
  4,871
  5,006
  5,159
  5,330
  5,519
  5,726
  5,950
  6,193
  6,454
  6,733
  8,848
  9,167
  9,506
  9,866
  10,247
  10,652
  11,080
  11,532
  12,010
  12,515
  13,047
  13,608
  14,200
  14,823
  15,479
  16,170
  16,896
  17,661
  18,466
  19,312
Tax expense, $m
  718
  1,315
  1,352
  1,393
  1,439
  1,490
  1,546
  1,607
  1,672
  1,742
  1,818
  2,389
  2,475
  2,567
  2,664
  2,767
  2,876
  2,992
  3,114
  3,243
  3,379
  3,523
  3,674
  3,834
  4,002
  4,179
  4,366
  4,562
  4,769
  4,986
  5,214
Net income, $m
  3,920
  3,556
  3,654
  3,766
  3,891
  4,029
  4,180
  4,344
  4,521
  4,711
  4,915
  6,459
  6,692
  6,939
  7,202
  7,481
  7,776
  8,088
  8,419
  8,767
  9,136
  9,524
  9,934
  10,366
  10,821
  11,299
  11,804
  12,334
  12,893
  13,480
  14,098

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  14,341
  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
  82,695
  84,597
  86,771
  89,212
  91,916
  94,884
  98,115
  101,613
  105,382
  109,426
  113,753
  118,369
  123,285
  128,509
  134,053
  139,927
  146,146
  152,722
  159,670
  167,007
  174,748
  182,912
  191,517
  200,583
  210,133
  220,187
  230,769
  241,905
  253,621
  265,943
Adjusted assets (=assets-cash), $m
  81,036
  82,695
  84,597
  86,771
  89,212
  91,916
  94,884
  98,115
  101,613
  105,382
  109,426
  113,753
  118,369
  123,285
  128,509
  134,053
  139,927
  146,146
  152,722
  159,670
  167,007
  174,748
  182,912
  191,517
  200,583
  210,133
  220,187
  230,769
  241,905
  253,621
  265,943
Revenue / Adjusted assets
  0.491
  0.491
  0.491
  0.491
  0.491
  0.491
  0.491
  0.491
  0.491
  0.491
  0.491
  0.491
  0.491
  0.491
  0.491
  0.491
  0.491
  0.491
  0.491
  0.491
  0.491
  0.491
  0.491
  0.491
  0.491
  0.491
  0.491
  0.491
  0.491
  0.491
  0.491
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
  -365
  -374
  -383
  -394
  -406
  -419
  -434
  -449
  -466
  -484
  -503
  -523
  -545
  -568
  -592
  -618
  -646
  -675
  -706
  -738
  -772
  -808
  -846
  -886
  -929
  -973
  -1,020
  -1,069
  -1,121
  -1,175
Total debt, $m
  24,842
  25,372
  26,656
  28,123
  29,771
  31,597
  33,600
  35,781
  38,142
  40,686
  43,416
  46,336
  49,452
  52,770
  56,297
  60,038
  64,004
  68,201
  72,640
  77,330
  82,282
  87,508
  93,018
  98,827
  104,947
  111,393
  118,179
  125,322
  132,839
  140,747
  149,065
Total liabilities, $m
  55,289
  55,819
  57,103
  58,570
  60,218
  62,044
  64,047
  66,228
  68,589
  71,133
  73,863
  76,783
  79,899
  83,217
  86,744
  90,485
  94,451
  98,648
  103,087
  107,777
  112,729
  117,955
  123,465
  129,274
  135,394
  141,840
  148,626
  155,769
  163,286
  171,194
  179,512
Total equity, $m
  40,088
  26,876
  27,494
  28,201
  28,994
  29,873
  30,837
  31,888
  33,024
  34,249
  35,563
  36,970
  38,470
  40,068
  41,765
  43,567
  45,476
  47,497
  49,635
  51,893
  54,277
  56,793
  59,446
  62,243
  65,190
  68,293
  71,561
  75,000
  78,619
  82,427
  86,432
Total liabilities and equity, $m
  95,377
  82,695
  84,597
  86,771
  89,212
  91,917
  94,884
  98,116
  101,613
  105,382
  109,426
  113,753
  118,369
  123,285
  128,509
  134,052
  139,927
  146,145
  152,722
  159,670
  167,006
  174,748
  182,911
  191,517
  200,584
  210,133
  220,187
  230,769
  241,905
  253,621
  265,944
Debt-to-equity ratio
  0.620
  0.940
  0.970
  1.000
  1.030
  1.060
  1.090
  1.120
  1.150
  1.190
  1.220
  1.250
  1.290
  1.320
  1.350
  1.380
  1.410
  1.440
  1.460
  1.490
  1.520
  1.540
  1.560
  1.590
  1.610
  1.630
  1.650
  1.670
  1.690
  1.710
  1.720
Adjusted equity ratio
  0.318
  0.325
  0.325
  0.325
  0.325
  0.325
  0.325
  0.325
  0.325
  0.325
  0.325
  0.325
  0.325
  0.325
  0.325
  0.325
  0.325
  0.325
  0.325
  0.325
  0.325
  0.325
  0.325
  0.325
  0.325
  0.325
  0.325
  0.325
  0.325
  0.325
  0.325

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  3,920
  3,556
  3,654
  3,766
  3,891
  4,029
  4,180
  4,344
  4,521
  4,711
  4,915
  6,459
  6,692
  6,939
  7,202
  7,481
  7,776
  8,088
  8,419
  8,767
  9,136
  9,524
  9,934
  10,366
  10,821
  11,299
  11,804
  12,334
  12,893
  13,480
  14,098
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
  9,123
  9,329
  9,559
  9,814
  10,093
  10,396
  10,724
  11,077
  11,456
  11,370
  11,802
  12,262
  12,750
  13,268
  13,817
  14,398
  15,013
  15,661
  16,346
  17,069
  17,831
  18,635
  19,481
  20,372
  21,311
  22,298
  23,337
  24,431
  25,580
Change in working capital, $m
  -2,601
  -7
  -8
  -10
  -11
  -12
  -13
  -14
  -15
  -17
  -18
  -19
  -20
  -22
  -23
  -24
  -26
  -27
  -29
  -31
  -32
  -34
  -36
  -38
  -40
  -42
  -44
  -47
  -49
  -52
  -54
Cash from operations, $m
  10,376
  8,950
  9,132
  9,339
  9,570
  9,826
  10,106
  10,410
  10,740
  11,094
  11,474
  11,390
  11,823
  12,284
  12,773
  13,293
  13,843
  14,426
  15,042
  15,692
  16,379
  17,103
  17,867
  18,673
  19,521
  20,414
  21,355
  22,345
  23,387
  24,482
  25,635
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
  4,820
  4,806
  4,822
  4,854
  4,900
  4,959
  5,030
  5,114
  5,210
  5,317
  4,946
  5,078
  5,220
  5,375
  5,542
  5,722
  5,914
  6,119
  6,338
  6,571
  6,818
  7,080
  7,357
  7,651
  7,961
  8,289
  8,635
  8,999
  9,384
  9,790
Issuance/(repayment) of debt, $m
  -1,307
  1,098
  1,284
  1,468
  1,648
  1,826
  2,003
  2,181
  2,361
  2,544
  2,730
  2,920
  3,116
  3,318
  3,526
  3,742
  3,965
  4,197
  4,439
  4,690
  4,952
  5,225
  5,511
  5,809
  6,120
  6,446
  6,786
  7,143
  7,517
  7,908
  8,318
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
  1,098
  1,284
  1,468
  1,648
  1,826
  2,003
  2,181
  2,361
  2,544
  2,730
  2,920
  3,116
  3,318
  3,526
  3,742
  3,965
  4,197
  4,439
  4,690
  4,952
  5,225
  5,511
  5,809
  6,120
  6,446
  6,786
  7,143
  7,517
  7,908
  8,318
Total cash flow (excl. dividends), $m
  3,115
  5,918
  6,090
  6,290
  6,502
  6,725
  6,962
  7,211
  7,475
  7,753
  8,047
  7,867
  8,194
  8,538
  8,902
  9,284
  9,687
  10,112
  10,558
  11,028
  11,523
  12,043
  12,590
  13,166
  13,771
  14,407
  15,075
  15,778
  16,516
  17,292
  18,108
Retained Cash Flow (-), $m
  4,588
  -561
  -618
  -707
  -793
  -879
  -964
  -1,050
  -1,137
  -1,225
  -1,314
  -1,406
  -1,500
  -1,598
  -1,698
  -1,802
  -1,909
  -2,021
  -2,137
  -2,258
  -2,384
  -2,516
  -2,653
  -2,797
  -2,947
  -3,103
  -3,268
  -3,439
  -3,619
  -3,808
  -4,005
Prev. year cash balance distribution, $m
 
  13,773
  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
 
  19,130
  5,471
  5,583
  5,708
  5,846
  5,997
  6,161
  6,338
  6,529
  6,733
  6,461
  6,693
  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
  12,338
  12,897
  13,485
  14,103
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
 
  18,341
  5,009
  4,859
  4,700
  4,532
  4,352
  4,162
  3,962
  3,750
  3,530
  3,068
  2,856
  2,639
  2,418
  2,197
  1,977
  1,760
  1,551
  1,350
  1,161
  985
  825
  680
  551
  440
  344
  265
  200
  147
  106
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. is a global healthcare company. The Company offers health solutions through its prescription medicines, vaccines, biologic therapies and animal health products. It operates through four segments: Pharmaceutical, Animal Health, Healthcare Services and Alliances. The Company's Pharmaceutical segment includes human health pharmaceutical and vaccine products marketed either directly by the Company or through joint ventures. Human health pharmaceutical products consist of therapeutic and preventive agents, generally sold by prescription, for the treatment of human disorders. The Company sells its human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed healthcare providers, such as health maintenance organizations, pharmacy benefit managers and other institutions. Vaccine products consist of preventive pediatric, adolescent and adult vaccines, primarily administered at physician offices.

FINANCIAL RATIOS  of  Merck&Co (MRK)

Valuation Ratios
P/E Ratio 44.8
Price to Sales 4.4
Price to Book 4.4
Price to Tangible Book
Price to Cash Flow 16.9
Price to Free Cash Flow 20
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 25
Current Ratio 0.3
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 12.2%
Oper. Margin - 3 Yr. Avg. 22%
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 -0.9%. 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 2737.37 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 $174.9 billion.

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COMPANY NEWS

▶ Merck to Shed Some U.S. Sales Reps to Cut Costs   [Oct-20-17 04:53PM  The Wall Street Journal]
▶ Merck's sales force restructuring means 840 jobs lost   [04:50PM  American City Business Journals]
▶ Merck: Is Keytruda a $16B Drug?   [02:28PM  Barrons.com]
▶ Behind Mercks Performance in 3Q17   [Oct-17-17 03:56PM  Market Realist]
▶ Better Buy: AbbVie Inc. vs. Merck   [Oct-14-17 10:33AM  Motley Fool]
▶ [$$] Ebola Vaccines Show Promise in New Study   [Oct-11-17 05:31PM  The Wall Street Journal]
▶ Company News For Oct 11, 2017   [09:46AM  Zacks]
▶ Changes in Eli Lillys Valuation   [07:37AM  Market Realist]
▶ [$$] LBO Profile: GHIF Uses PE Model to Tackle Global Health Challenges   [Oct-04-17 03:50PM  The Wall Street Journal]
▶ [$$] Merck Abandons New Hepatitis C Drugs Amid Crowded Market   [Sep-30-17 12:33AM  The Wall Street Journal]
▶ Nike, Merck Weigh on DJIA Friday   [Sep-29-17 04:01PM  24/7 Wall St.]
▶ [$$] Merck Abandons New Hepatitis C Drugs   [01:23PM  The Wall Street Journal]
▶ Major Pharma Short Interest Piles On   [Sep-27-17 09:00AM  24/7 Wall St.]
▶ Apple, UnitedHealth Weigh on DJIA Friday   [Sep-22-17 04:01PM  24/7 Wall St.]
▶ Pfizer and Johnson & Johnson's Brewing Brawl Gets Real   [Sep-20-17 08:46PM  Motley Fool]
▶ 2 Important Dates for Big Pharma   [03:50PM  GuruFocus.com]
▶ Buy Bristol-Myers Squibb Co (BMY) Stock With No Fear   [Sep-18-17 10:19AM  InvestorPlace]
▶ Dow Jones Closes at New High   [Sep-15-17 08:02AM  GuruFocus.com]
▶ Major Pharma Short Interest Surges   [08:40AM  24/7 Wall St.]
▶ Inside Mercks Segment-Wise Performance in 2Q17   [Sep-08-17 10:37AM  Market Realist]
▶ Behind Mercks Revenues in 2Q17   [09:07AM  Market Realist]
▶ Understanding Mercks Valuation after 2Q17   [07:38AM  Market Realist]
Financial statements 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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