Although Merck (currently trading at $84.57 per share) has gained 7% over the last six months, it has trailed the S&P 500’s 21.3% return during that period. This may have investors wondering how to approach the situation.
Given the relatively weaker price action, is now a good time to buy MRK, or is it a pass? Find out in our full research report, it’s free for active Edge members.
Why Is MRK a Good Business?
With roots dating back to 1891 and a portfolio that includes the blockbuster cancer immunotherapy Keytruda, Merck (NYSE: MRK) develops and sells prescription medicines, vaccines, and animal health products across oncology, infectious diseases, cardiovascular, and other therapeutic areas.
1. Economies of Scale Give It Negotiating Leverage with Suppliers
Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.
With $64.23 billion in revenue over the past 12 months, Merck is one of the most scaled enterprises in healthcare. This is particularly important because branded pharmaceuticals companies are volume-driven businesses due to their low margins.
2. Adjusted Operating Margin Rising, Profits Up
Adjusted operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies because it excludes non-recurring expenses, interest on debt, and taxes.
Looking at the trend in its profitability, Merck’s adjusted operating margin rose by 21 percentage points over the last two years, as its sales growth gave it operating leverage. Its adjusted operating margin for the trailing 12 months was 40.1%.
3. Increasing Free Cash Flow Margin Juices Financials
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Merck’s margin expanded by 7.8 percentage points over the last five years. This is encouraging because it gives the company more optionality. Merck’s free cash flow margin for the trailing 12 months was 23.2%.
Final Judgment
These are just a few reasons Merck is a high-quality business worth owning. With its shares trailing the market in recent months, the stock trades at 9.6× forward P/E (or $84.57 per share). Is now a good time to buy? See for yourself in our in-depth research report, it’s free for active Edge members.
Stocks We Like Even More Than Merck
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