3 Reasons We Love Merck (MRK)

Over the past six months, Merck has been a great trade, beating the S&P 500 by 32%. Its stock price has climbed to $118.94, representing a healthy 37.8% increase. This performance may have investors wondering how to approach the situation.

Is now still a good time to buy MRK? Or is this a case of a company fueled by heightened investor enthusiasm? Find out in our full research report, it’s free.

Why Are We Positive On MRK?

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 $65.09 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 30.8 percentage points over the last two years, as its sales growth gave it immense operating leverage. Its adjusted operating margin for the trailing 12 months was 41.1%.

3. Excellent Free Cash Flow Margin Boosts Reinvestment Potential

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.

Merck has shown robust cash profitability, giving it an edge over its competitors and the ability to reinvest or return capital to investors. The company’s free cash flow margin averaged 21.5% over the last five years, quite impressive for a healthcare business.

Final Judgment

These are just a few reasons Merck is a rock-solid business worth owning, and with its shares topping the market in recent months, the stock trades at 23.5× forward P/E (or $118.94 per share). Is now a good time to initiate a position? See for yourself in our full research report, it’s free.

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