Margins matter. The more Merck
Here's the current margin snapshot for Merck and some of its sector and industry peers and direct competitors.
TTM Gross Margin
TTM Operating Margin
TTM Net Margin
Dr. Reddy’s Laboratories
Source: Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.
Unfortunately, that table doesn't tell us much about where Merck has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.
Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months (TTM), the last fiscal year, and the last fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect and what to watch.
Here's the margin picture for Merck over the past few years.
Source: Capital IQ, a division of Standard & Poor's. Dollar amounts in millions. FY= fiscal year. TTM = trailing 12 months.
(Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them.)
Here's how the stats break down:
- Over the past five years, gross margin peaked at 77.4% and averaged 75.1%. Operating margin peaked at 28.0% and averaged 25.0%. Net margin peaked at 47.0% and averaged 26.8%.
- TTM gross margin is 62.7%, 1,240 basis points worse than the five-year average. TTM operating margin is 16.5%, 850 basis points worse than the five-year average. TTM net margin is 17.9%, 890 basis points worse than the five-year average.
With recent TTM operating margins below historical averages, Merck has some work to do.
If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. To stay ahead, learn more about how I use analysis like this to help me uncover the best returns in the stock market. Have an opinion on the margins at PotashCorp? Let us know in the comments section below.