Earnings

Which Market Offer More Value? – Apple Inc. (AAPL), Merck & Co., Inc. (MRK)

The shares of Apple Inc. have increased by more than 11.20% this year alone. The shares recently went up by 0.93% or $1.74 and now trades at $188.18. The shares of Merck & Co., Inc. (NYSE:MRK), has jumped by 6.18% year to date as of 05/16/2018. The shares currently trade at $59.75 and have been able to report a change of 3.11% over the past one week.

The stock of Apple Inc. and Merck & Co., Inc. were two of the most active stocks on Wednesday. Investors seem to be very interested in what happens to the stocks of these two companies but do investors favor one over the other? We will analyze the growth, profitability, risk, valuation, and insider trends of both companies and see which one investors prefer.

Next 5Y EPS Growth: 13.45% versus 6.66%

When a company is able to grow consistently in terms of earnings at a high compound rate have the highest likelihood of creating value for its shareholders over time. Analysts have predicted that AAPL will grow it’s earning at a 13.45% annual rate in the next 5 years. This is in contrast to MRK which will have a positive growth at a 6.66% annual rate. This means that the higher growth rate of AAPL implies a greater potential for capital appreciation over the years.

Profitability and Returns

Growth alone cannot be used to see if the company will be valuable. Shareholders will be the losers if a company invest in ventures that aren’t profitable enough to support upbeat growth. In order for us to accurately measure profitability and return, we will be using the EBITDA margin and Return on Investment (ROI), which balances the difference in capital structure. AAPL has an EBITDA margin of 31.83%, this implies that the underlying business of AAPL is more profitable. The ROI of AAPL is 18.30% while that of MRK is 8.70%. These figures suggest that AAPL ventures generate a higher ROI than that of MRK.

Cash Flow



The value of a stock is ultimately determined by the amount of cash flow that the investors have available. Over the last 12 months, AAPL’s free cash flow per share is a positive 3.39, while that of MRK is negative -1.48.

Liquidity and Financial Risk

The ability of a company to meet up with its short-term obligations and be able to clear its longer-term debts is measured using Liquidity and leverage ratios. The current ratio for AAPL is 1.50 and that of MRK is 1.40. This implies that it is easier for AAPL to cover its immediate obligations over the next 12 months than MRK. The debt ratio of AAPL is 0.96 compared to 0.70 for MRK. AAPL can be able to settle its long-term debts and thus is a lower financial risk than MRK.

Valuation

AAPL currently trades at a forward P/E of 14.17, a P/B of 7.45, and a P/S of 3.83 while MRK trades at a forward P/E of 13.15, a P/B of 4.78, and a P/S of 3.95. This means that looking at the earnings, book values and sales basis, AAPL is the cheaper one. It is very obvious that earnings are the most important factors to investors, thus analysts are most likely to place their bet on the P/E.

Analyst Price Targets and Opinions




The mistake some people make is that they think a cheap stock has more value to it. In order to know the value of a stock, there is need to compare its current price to its likely trading price in the future. The price of AAPL is currently at a -3.24% to its one-year price target of 194.49. Looking at its rival pricing, MRK is at a -13.15% relative to its price target of 68.80.

When looking at the investment recommendation on say a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell), AAPL is given a 2.00 while 2.00 placed for MRK. This means that analysts are equally bullish on their outlook for the two stocks stocks.

Insider Activity and Investor Sentiment

Short interest or otherwise called the percentage of a stock’s tradable shares currently being shorted is another data that investors use to get a handle on sentiment. The short ratio for AAPL is 1.51 while that of MRK is just 1.76. This means that analysts are more bullish on the forecast for AAPL stock.

Conclusion

The stock of Merck & Co., Inc. defeats that of Apple Inc. when the two are compared, with MRK taking 5 out of the total factors that were been considered. MRK happens to be more profitable, generates a higher ROI, has higher cash flow per share, higher liquidity and has a lower financial risk. When looking at the stock valuation, MRK is the cheaper one on an earnings, book value and sales basis. Finally, the sentiment signal for MRK is better on when it is viewed on short interest.

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