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The subdued stock price reaction suggests that Merck & Co., Inc.'s (NYSE:MRK) strong earnings didn't offer any surprises. We think that investors have missed some encouraging factors underlying the profit figures.
We've discovered 2 warning signs about Merck. View them for free.
How Do Unusual Items Influence Profit?
Importantly, our data indicates that Merck's profit was reduced by US$3.5b, due to unusual items, over the last year. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Merck to produce a higher profit next year, all else being equal.
That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.
Our Take On Merck's Profit Performance
Because unusual items detracted from Merck's earnings over the last year, you could argue that we can expect an improved result in the current quarter. Based on this observation, we consider it likely that Merck's statutory profit actually understates its earnings potential! Furthermore, it has done a great job growing EPS over the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing Merck at this point in time. While conducting our analysis, we found that Merck has 2 warning signs and it would be unwise to ignore them.
This note has only looked at a single factor that sheds light on the nature of Merck's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.
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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.