Over the past six months, Merit Medical Systems’s shares (currently trading at $91) have posted a disappointing 6.8% loss while the S&P 500 was flat. This 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? See what our analysts have to say in our full research report, it’s free.
Why Is Merit Medical Systems Not Exciting?
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why MMSI doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Merit Medical Systems’s sales grew at a mediocre 6.8% compounded annual growth rate over the last five years. This was below our standard for the healthcare sector. 
2. 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 $1.39 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.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative 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 3.8%, lower than the typical cost of capital (how much it costs to raise money) for healthcare companies.
Final Judgment
Merit Medical Systems isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 24.5× forward P/E (or $91 per share). This valuation tells us a lot of optimism is priced in - you can find more timely opportunities elsewhere. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.
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