Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?
One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Merck & Co., Inc. (MRK - Free Report) stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:
A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.
On this front, Merck & Co. has a trailing twelve months PE ratio of 17.94, as you can see in the chart below:
This level actually compares quite favorably with the market at large, as the PE for the S&P 500 stands at about 20.83. However, if we focus on the long-term PE trend, Merck & Co.’s current PE level puts it above its midpoint of 16.49 over the past five years.
The stock’s PE however compares quite favorably with the Medical Market’s trailing twelve months PE ratio, which stands at 23.53. This indicates that the stock is undervalued right now, compared to its peers.
Meanwhile Merck & Co. has a forward PE ratio (price relative to this year’s earnings) of 16.44, which is lower than the current level. So, so it is fair to say that a more value-oriented path is ahead of the stock in the near term.
An often-overlooked ratio that can still be a great indicator of value is the price/cash flow metric. This ratio doesn’t take amortization and depreciation into account, so can give a more accurate picture of the financial health in a business. This is a preferred metric to some valuation investors because cash flows are (a) generally less prone to manipulation by the company’s management, and (b) are less affected by variation in accounting policies between different companies.
The ratio is generally applied to find out whether a company’s stock is overpriced or underpriced with reference to its cash flows generation potential compared with its competitors. However, it is not commonly used for cross-industry comparison, as the average price to cash flow ratio varies from industry to industry.
In this case, Merck & Co.’s P/CF ratio of 19.12 is slightly below the Zacks Large Cap Pharma industry’s average of 19.37, which indicates that the stock is somewhat undervalued in this respect.
Broad Value Outlook
In aggregate, Merck & Co. currently has a Value Score of B, putting it into the top 40% of all stocks we cover from this look. This makes Merck & Co. a solid choice for value investors.
What About the Stock Overall?
Though Merck & Co. might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth Score of A and a Momentum Score of B. This gives MRK a Zacks VGM score — or its overarching fundamental grade — of A. (You can read more about the Zacks Style Scores here >>).
Meanwhile, the company’s recent earnings estimates have been upbeat. While the current-year estimate has seen one upward and no downward movement, the next-year estimate has seen two upward and one downward movement over the past two months.
This has had a positive effect on the consensus estimate. While the current-year consensus has risen 0.8% over the past two months, the next-year estimate has climbed 0.7%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Despite such positive analyst sentiments, the stock has a Zacks Rank #3 (Hold) and it is the reason why we are looking for in line performance from the company in the near term.
Merck & Co. is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Despite a strong industry rank (among Top 21% of more than 250 industries), with a Zacks Rank #3, it is hard to get too excited about the stock.
Also, over the past two years, the broader industry has clearly underperformed the market at large, as you can see below:
So, value investors might want to wait for Zacks rank and past industry performance to turn around in this name first, but once that happens, this stock could be a compelling pick.
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