Some have more dollars than sense, they say, so even companies that have no revenue, no profit, and a record of falling short, can easily find investors. And in their study titled Who Falls Prey to the Wolf of Wall Street?' Leuz et. al. found that it is 'quite common' for investors to lose money by buying into 'pump and dump' schemes.
In contrast to all that, I prefer to spend time on companies like Merck (NYSE:MRK), which has not only revenues, but also profits. Now, I'm not saying that the stock is necessarily undervalued today; but I can't shake an appreciation for the profitability of the business itself. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.
Merck's Improving Profits
Over the last three years, Merck has grown earnings per share (EPS) like young bamboo after rain; fast, and from a low base. So I don't think the percent growth rate is particularly meaningful. Thus, it makes sense to focus on more recent growth rates, instead. Like a wedge-tailed eagle on the wind, Merck's EPS soared from US$3.61 to US$4.55, in just one year. That's a impressive gain of 26%.
I like to take a look at earnings before interest and (EBIT) tax margins, as well as revenue growth, to get another take on the quality of the company's growth. While we note Merck's EBIT margins were flat over the last year, revenue grew by a solid 3.0% to US$47b. That's a real positive.
You can take a look at the company's revenue and earnings growth trend, in the chart below. To see the actual numbers, click on the chart.
Of course the knack is to find stocks that have their best days in the future, not in the past. You could base your opinion on past performance, of course, but you may also want to check this interactive graph of professional analyst EPS forecasts for Merck.
Are Merck Insiders Aligned With All Shareholders?
Since Merck has a market capitalization of US$203b, we wouldn't expect insiders to hold a large percentage of shares. But we do take comfort from the fact that they are investors in the company. With a whopping US$97m worth of shares as a group, insiders have plenty riding on the company's success. This should keep them focused on creating long term value for shareholders.
Should You Add Merck To Your Watchlist?
For growth investors like me, Merck's raw rate of earnings growth is a beacon in the night. Further, the high level of insider ownership impresses me, and suggests that I'm not the only one who appreciates the EPS growth. Fast growth and confident insiders should be enough to warrant further research. So the answer is that I do think this is a good stock to follow along with. Don't forget that there may still be risks. For instance, we've identified 2 warning signs for Merck that you should be aware of.
Of course, you can do well (sometimes) buying stocks that are not growing earnings and do not have insiders buying shares. But as a growth investor I always like to check out companies that do have those features. You can access a free list of them here.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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