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Critical Comparison: Merck & Co., Inc. (MRK) vs. Exelon Corporation (EXC)

Merck & Co., Inc. (NYSE:MRK) shares are up more than 4.98% this year and recently decreased -1.14% or -$0.68 to settle at $59.07. Exelon Corporation (NYSE:EXC), on the other hand, is down -0.15% year to date as of 05/17/2018. It currently trades at $39.35 and has returned -3.08% during the past week.

Merck & Co., Inc. (NYSE:MRK) and Exelon Corporation (NYSE:EXC) are the two most active stocks in the Drug Manufacturers – Major industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect MRK to grow earnings at a 6.66% annual rate over the next 5 years. Comparatively, EXC is expected to grow at a 4.72% annual rate. All else equal, MRK’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 30.36% for Exelon Corporation (EXC). MRK’s ROI is 8.70% while EXC has a ROI of 6.30%. The interpretation is that MRK’s business generates a higher return on investment than EXC’s.

Cash Flow



The value of a stock is simply the present value of its future free cash flows. MRK’s free cash flow (“FCF”) per share for the trailing twelve months was -0.22. Comparatively, EXC’s free cash flow per share was -0.73. On a percent-of-sales basis, MRK’s free cash flow was -1.48% while EXC converted -2.1% 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 1.40 compared to 1.10 for EXC. This means that MRK can more easily cover its most immediate liabilities over the next twelve months. MRK’s debt-to-equity ratio is 0.70 versus a D/E of 1.20 for EXC. EXC is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

MRK trades at a forward P/E of 13.00, a P/B of 4.73, and a P/S of 3.91, compared to a forward P/E of 12.87, a P/B of 1.26, and a P/S of 1.10 for EXC. MRK is the expensive 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

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. MRK is currently priced at a -14.14% to its one-year price target of 68.80. Comparatively, EXC is -7.8% relative to its price target of 42.68. This suggests that MRK is the better investment over the next year.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. MRK has a beta of 0.77 and EXC’s beta is 0.19. EXC’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. MRK has a short ratio of 1.77 compared to a short interest of 3.59 for EXC. This implies that the market is currently less bearish on the outlook for MRK.

Summary

Merck & Co., Inc. (NYSE:MRK) beats Exelon Corporation (NYSE:EXC) on a total of 8 of the 14 factors compared between the two stocks. MRK is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. MRK is more undervalued relative to its price target. Finally, MRK has better sentiment signals based on short interest.

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