Merck & Co., Inc. (NYSE:MRK) shares are down more than -3.89% this year and recently increased 1.78% or $0.99 to settle at $56.58. AbbVie Inc. (NYSE:ABBV), on the other hand, is up 52.84% year to date as of 11/07/2017. It currently trades at $95.71 and has returned 3.54% during the past week.
Merck & Co., Inc. (NYSE:MRK) and AbbVie Inc. (NYSE:ABBV) are the two most active stocks in the Drug Manufacturers – Major industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect MRK to grow earnings at a 4.75% annual rate over the next 5 years. Comparatively, ABBV is expected to grow at a 15.72% annual rate. All else equal, ABBV’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 40.46% for AbbVie Inc. (ABBV). MRK’s ROI is 6.40% while ABBV has a ROI of 18.00%. The interpretation is that ABBV’s business generates a higher return on investment than MRK’s.
The value of a stock is simply the present value of its future free cash flows. On a percent-of-sales basis, MRK’s free cash flow was 0% while ABBV converted 0% of its revenues into cash flow. This means that, for a given level of sales, MRK is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. MRK has a current ratio of 1.50 compared to 1.40 for ABBV. This means that MRK can more easily cover its most immediate liabilities over the next twelve months. MRK’s debt-to-equity ratio is 0.63 versus a D/E of 6.20 for ABBV. ABBV is therefore the more solvent of the two companies, and has lower financial risk.
MRK trades at a forward P/E of 13.84, a P/B of 3.92, and a P/S of 3.89, compared to a forward P/E of 14.75, a P/B of 25.39, and a P/S of 5.60 for ABBV. MRK is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. MRK is currently priced at a -14.53% to its one-year price target of 66.20. Comparatively, ABBV is 0.86% relative to its price target of 94.89. This suggests that MRK is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.40 for MRK and 2.30 for ABBV, which implies that analysts are more bullish on the outlook for MRK.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. MRK has a beta of 0.79 and ABBV’s beta is 1.52. MRK’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. MRK has a short ratio of 2.09 compared to a short interest of 2.12 for ABBV. This implies that the market is currently less bearish on the outlook for MRK.
Merck & Co., Inc. (NYSE:MRK) beats AbbVie Inc. (NYSE:ABBV) on a total of 8 of the 14 factors compared between the two stocks. MRK higher liquidity and has lower financial risk. In terms of valuation, MRK is the cheaper of the two stocks on an earnings, book value and sales basis, MRK is more undervalued relative to its price target. Finally, MRK has better sentiment signals based on short interest.