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)

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

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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