Shareholders of Merit Medical Systems would probably like to forget the past six months even happened. The stock dropped 26.3% and now trades at $64.41. This might have investors contemplating their next move.
Is there a buying opportunity in Merit Medical Systems, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Merit Medical Systems Not Exciting?
Despite the more favorable entry price, we're cautious about Merit Medical Systems. Here are two reasons we avoid MMSI and a stock we'd rather own.
1. Fewer Distribution Channels Limit its Ceiling
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 just $1.54 billion in revenue over the past 12 months, Merit Medical Systems is a small company in an industry where scale matters. This makes it difficult to build trust with customers because healthcare is heavily regulated, complex, and resource-intensive.
2. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Merit Medical Systems historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 5.2%, somewhat low compared to the best healthcare companies that consistently pump out 20%+.
Final Judgment
Merit Medical Systems isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 15.7× forward P/E (or $64.41 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at a top digital advertising platform riding the creator economy.
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