A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. As 2013 begins, I would like to focus on a diversified global health care giant: Merck & Co, Inc. (NYSE:MRK).
The Business:
Warren Buffett once said, “Never invest in a business you can’t understand.” This not only allows the investor to purchase a company with conviction, however also allows them to spot trends blind to unfamiliar eyes. With this in mind, investors in any company should fully understand the business model of the company. Merck is global health care company which offers solutions through prescription medicines, vaccines, biologic therapies, animal health, and consumer care products. Based on market capitalization, Merck is valued at $125.92 billion. Because of the company’s pricing power, Merck possesses a profit margin of 11.94%.
Strengths:
- Solid Revenue Growth: In 2000, Merck reported revenue of roughly $32 billion; in 2011, the company announced revenue of $48.04 billion, representing year over year annual growth of 3.76%, but future growth is expected to slow considerably with projections placing 2017 revenue at $49.30 billion. This historic growth has been a result of the consistent offering of new and innovative products
- Positive Free Cash Flow Position: In 2013, the company is projected to generate $13 billion of free cash flow, allowing the company to distribute to shareholders or reinvest in their own business
- Institutional Vote of Confidence: 72.31% of shares outstanding are held by institutional investors, displaying the confidence some of largest investors in the world have in the company and its future
- Relatively Low Volatility: Currently, the company carries a beta ratio of 0.32, representing a company trading with considerably less volatility than the overall market, a major upside for long-term investors
- Dividend: Presently, Merck pays out quarterly dividends of $0.43, which annualized puts the dividend yield at 4.15%
- Diversified Product Portfolio: Merck possesses a diverse product portfolio with products ranging from vaccines, prescription products, consumer products, and animal health; with major brands including Dr. Scholl’s, Claritin, and Coppertone; with the company’s pharmaceutical portfolio including Nasonex, Alimentary, Zocor, Remicade, NuvaRing, Singulair, and Temodar, and with this diversified product portfolio comes a greater level of security and predictability for investors
- Net Cash Position: Merck’s $24 billion of cash and cash equivalents outweighs its $23 billion in debt, resulting in a $916 million cash position, a strength of the company
- Necessity Products: The wide majority of products the company sells are considered necessities, and with this comes a stronger company in times of economic downfall
Weaknesses:
- High Valuation: At the moment, Merck carries a price to earnings ratio of 19.13 and a price to sales ratio of 2.66, both of which indicate a company trading with a fairly high valuation
- Margin Contraction: The company’s profit margin has contracted from 56.73% in 2008 to the current level of 11.94%, and this trend of margin contraction is a major weakness in the company
