2020 CFA Research Challenge: Merck (MRK)

November 2, 2019

EDS is a Decision-Support & Analytics platform for fundamental investors. Originally developed inside of multiple successful funds, it is now available commercially, helping leading funds become more systematic & data-driven for investment workflows, such as Idea Generation, Portfolio Construction & Risk Management

As part of the 2020 CFA Research Challenge, EDS is providing a glimpse into their award winning platform for students. 

The EDS Idea Generation Module:

 

  • The benefits of combining multiple, time-series charts to tell a story.

  • How to find the "DRIVERS" of my stocks.

  • What is the "RIGHT" Price Target. How much upside is there?

 

Case Study on Merck (MRK) 

____________________________________________________________________________Over the past 10 years, Merck has kept pace with S&P 500 (10% annualized return for each). However, over the last three years, it has outperformed the S&P 500. Has the company turned the corner? Can it continue to outperform? While it is beyond the scope of our expertise to provide an opinion, one of the strengths of EDS, is the ability to understand “change”, focus investors on the metrics that matter, and put the upside in context.

 

MERCK FUNDAMENTAL TIME-SERIES ANALYSIS (EDS TEARSHEET)

 

Figure 1. Stock Drivers / Correlation: Rigorous research increasingly includes statistical analysis, which is difficult in Bloomberg, and is inefficient in excel. The EDS Tearsheet provides on-the-fly correlation/regression and time-series analysis across an unlimited set of metrics. For Merck, over the past three years, EBITDA Margins & Growth are correlated with the stock price. This might suggest that investors are heavily focused on margins.

 

PHARMA INDUSTRY TIME-SERIES ANALYSIS (EDS SCREENING)

 Figure 2. Cross-Sectional Industry Analysis: While it is important to focus on Merck, we also need to put their performance into context. relative to the US Pharma industry. EDS provides rigorous search, screening and configurable ranking, both historically and cross sectionally. In this case, margins have been rising for the whole group, not just Merck. In addition, it seems investors are not paying a higher multiple for rising margins at this point. A natural question would be why? Perhaps they don't view higher margins as sustainable....

 

MERCK PEER ANALYSIS (EDS COMP SHEET)

Figure 3. While Merck's margins are slightly higher than peers, its forecasted growth rate is a bit lower. Making the case for a higher valuation (the EV/EBITDA 2020 multiple of 11.2X is inline with peers and its 2020 PE of 15.3X is already higher) would likely rest on the company exceeding estimates. A case for this might be made, as we can see Merck has beaten EBITDA estimates 73% of the time over the last three years. However, offsetting this outperformance is a 19% increase in short interest over the past month. 

 

Good luck to the students of the 2020 CFA Research Challenge. For more information about Equity Data Science, please see our website at www.equitydatascience.com.

 

If you are interested in a demo or have any questions please reach out to us at sales@equitydatascience.com.
 

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