Stock Analysis on Net
Stock Analysis on Net

Merck & Co. Inc. (NYSE:MRK)

Present Value of Free Cash Flow to the Firm (FCFF)

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In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

Intrinsic Stock Value (Valuation Summary)

Merck & Co. Inc., free cash flow to the firm (FCFF) forecast

US$ in millions, except per share data

Microsoft Excel
Year Value FCFFt or Terminal value (TVt) Calculation Present value at 7.32%
01 FCFF0 9,363
1 FCFF1 6,435 = 9,363 × (1 + -31.28%) 5,996
2 FCFF2 4,986 = 6,435 × (1 + -22.51%) 4,330
3 FCFF3 4,301 = 4,986 × (1 + -13.74%) 3,480
4 FCFF4 4,087 = 4,301 × (1 + -4.97%) 3,082
5 FCFF5 4,243 = 4,087 × (1 + 3.80%) 2,981
5 Terminal value (TV5) 125,161 = 4,243 × (1 + 3.80%) ÷ (7.32% – 3.80%) 87,928
Intrinsic value of Merck & Co. Inc. capital 107,796
Less: Loans payable and long-term debt, including current portion (fair value) 32,000
Intrinsic value of Merck & Co. Inc. common stock 75,796
 
Intrinsic value of Merck & Co. Inc. common stock (per share) $29.96
Current share price $96.54

Based on: 10-K (reporting date: 2023-12-31).

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Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

Weighted Average Cost of Capital (WACC)

Merck & Co. Inc., cost of capital

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Value1 Weight Required rate of return2 Calculation
Equity (fair value) 244,211 0.88 7.96%
Loans payable and long-term debt, including current portion (fair value) 32,000 0.12 2.42% = 3.32% × (1 – 27.16%)

Based on: 10-K (reporting date: 2023-12-31).

1 US$ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 2,529,635,645 × $96.54
= $244,211,025,168.30

   Loans payable and long-term debt, including current portion (fair value). See details »

2 Required rate of return on equity is estimated by using CAPM. See details »

   Required rate of return on debt. See details »

   Required rate of return on debt is after tax.

   Estimated (average) effective income tax rate
= (80.00% + 11.70% + 11.00% + 19.40% + 13.70%) ÷ 5
= 27.16%

WACC = 7.32%

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Merck & Co. Inc., PRAT model

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Average Dec 31, 2023 Dec 31, 2022 Dec 31, 2021 Dec 31, 2020 Dec 31, 2019
Selected Financial Data (US$ in millions)
Interest expense 1,146 962 806 831 893
Income from discontinued operations, net of taxes — — 704 — —
Net income attributable to Merck & Co., Inc. 365 14,519 13,049 7,067 9,843
 
Effective income tax rate (EITR)1 80.00% 11.70% 11.00% 19.40% 13.70%
 
Interest expense, after tax2 229 849 717 670 771
Add: Cash dividends declared on common stock 7,551 7,134 6,715 6,307 5,820
Interest expense (after tax) and dividends 7,780 7,983 7,432 6,977 6,591
 
EBIT(1 – EITR)3 594 15,368 13,062 7,737 10,614
 
Loans payable and current portion of long-term debt 1,372 1,946 2,412 6,431 3,610
Long-term debt, excluding current portion 33,683 28,745 30,690 25,360 22,736
Total Merck & Co., Inc. stockholders’ equity 37,581 45,991 38,184 25,317 25,907
Total capital 72,636 76,682 71,286 57,108 52,253
Financial Ratios
Retention rate (RR)4 -12.09 0.48 0.43 0.10 0.38
Return on invested capital (ROIC)5 0.82% 20.04% 18.32% 13.55% 20.31%
Averages
RR -2.14
ROIC 14.61%
 
FCFF growth rate (g)6 -31.28%

Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).

1 See details »

2023 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 1,146 × (1 – 80.00%)
= 229

3 EBIT(1 – EITR) = Net income attributable to Merck & Co., Inc. – Income from discontinued operations, net of taxes + Interest expense, after tax
= 365 – 0 + 229
= 594

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [594 – 7,780] ÷ 594
= -12.09

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 594 ÷ 72,636
= 0.82%

6 g = RR × ROIC
= -2.14 × 14.61%
= -31.28%

FCFF growth rate (g) implied by single-stage model

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (276,211 × 7.32% – 9,363) ÷ (276,211 + 9,363)
= 3.80%

where:

Total capital, fair value0 = current fair value of Merck & Co. Inc. debt and equity (US$ in millions)
FCFF0 = the last year Merck & Co. Inc. free cash flow to the firm (US$ in millions)
WACC = weighted average cost of Merck & Co. Inc. capital

FCFF growth rate (g) forecast

Merck & Co. Inc., H-model

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Year Value gt
1 g1 -31.28%
2 g2 -22.51%
3 g3 -13.74%
4 g4 -4.97%
5 and thereafter g5 3.80%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5 – g1) × (2 – 1) ÷ (5 – 1)
= -31.28% + (3.80% – -31.28%) × (2 – 1) ÷ (5 – 1)
= -22.51%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= -31.28% + (3.80% – -31.28%) × (3 – 1) ÷ (5 – 1)
= -13.74%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= -31.28% + (3.80% – -31.28%) × (4 – 1) ÷ (5 – 1)
= -4.97%