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Critical Comparison: JPMorgan Chase & Co. (JPM) vs. Merck & Co., Inc. (MRK)

JPMorgan Chase & Co. (NYSE:JPM) shares are up more than 0.27% this year and recently decreased -4.46% or -$5.01 to settle at $107.23. Merck & Co., Inc. (NYSE:MRK), on the other hand, is up 38.99% year to date as of 12/04/2018. It currently trades at $78.21 and has returned 2.45% during the past week.

JPMorgan Chase & Co. (NYSE:JPM) and Merck & Co., Inc. (NYSE:MRK) are the two most active stocks based on recent 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.

Growth

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect JPM to grow earnings at a 9.68% annual rate over the next 5 years. Comparatively, MRK is expected to grow at a 9.54% annual rate. All else equal, JPM’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 30.02% for Merck & Co., Inc. (MRK). JPM’s ROI is 6.90% while MRK has a ROI of 8.70%. The interpretation is that MRK’s business generates a higher return on investment than JPM’s.

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. JPM’s free cash flow (“FCF”) per share for the trailing twelve months was +3.25. Comparatively, MRK’s free cash flow per share was +0.32. On a percent-of-sales basis, JPM’s free cash flow was 9.79% while MRK converted 2.15% of its revenues into cash flow. This means that, for a given level of sales, JPM is able to generate more free cash flow for investors.

Liquidity and Financial Risk

JPM’s debt-to-equity ratio is 1.17 versus a D/E of 0.73 for MRK. JPM is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

JPM trades at a forward P/E of 10.64, a P/B of 1.57, and a P/S of 4.93, compared to a forward P/E of 16.61, a P/B of 6.42, and a P/S of 4.99 for MRK. JPM 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

A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. JPM is currently priced at a -11.98% to its one-year price target of 121.82. Comparatively, MRK is -1.15% relative to its price target of 79.12. This suggests that JPM is the better investment over the next year.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. JPM has a beta of 1.11 and MRK’s beta is 0.72. 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. JPM has a short ratio of 1.24 compared to a short interest of 6.21 for MRK. This implies that the market is currently less bearish on the outlook for JPM.

Summary




JPMorgan Chase & Co. (NYSE:JPM) beats Merck & Co., Inc. (NYSE:MRK) on a total of 9 of the 14 factors compared between the two stocks. JPM is growing fastly, is more profitable, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, JPM is the cheaper of the two stocks on an earnings, book value and sales basis, JPM is more undervalued relative to its price target. Finally, JPM has better sentiment signals based on short interest.

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