Over the past six months, Merit Medical Systems has been a great trade, beating the S&P 500 by 9.1%. Its stock price has climbed to $85.50, representing a healthy 25.5% increase. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Merit Medical Systems, or should you be careful about including it in 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 momentum, we’re cautious about Merit Medical Systems. Here are two reasons you should be careful with MMSI, plus one 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 $1.58 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 5.6%, somewhat low compared to the best healthcare companies that consistently pump out 25%+.
Final Judgment
Merit Medical Systems isn’t a terrible business, but it isn’t one of our picks. With its shares topping the market in recent months, the stock trades at 19.6× forward P/E (or $85.50 per share). This valuation multiple is fair, but we don’t have much faith in the company. We’re pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at one of our top software and edge computing picks.
Stocks We Like More Than Merit Medical Systems
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