There wouldn't be many who think Merck & Co., Inc.'s (NYSE:MRK) price-to-earnings (or "P/E") ratio of 13.1x is worth a mention when the median P/E in the United States is similar at about 14x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
Recent times have been advantageous for Merck as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.
Want the full picture on analyst estimates for the company? Then our free report on Merck will help you uncover what's on the horizon.
How Is Merck's Growth Trending?
The only time you'd be comfortable seeing a P/E like Merck's is when the company's growth is tracking the market closely.
Taking a look back first, we see that the company grew earnings per share by an impressive 354% last year. Pleasingly, EPS has also lifted 83% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Looking ahead now, EPS is anticipated to climb by 7.9% per year during the coming three years according to the analysts following the company. That's shaping up to be similar to the 9.6% per annum growth forecast for the broader market.
In light of this, it's understandable that Merck's P/E sits in line with the majority of other companies. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.
What We Can Learn From Merck's P/E?
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that Merck maintains its moderate P/E off the back of its forecast growth being in line with the wider market, as expected. At this stage investors feel the potential for an improvement or deterioration in earnings isn't great enough to justify a high or low P/E ratio. It's hard to see the share price moving strongly in either direction in the near future under these circumstances.
There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Merck that you should be aware of.
You might be able to find a better investment than Merck. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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