Investors more bullish on Merck (NYSE:MRK) this week as stock climbs 4.1%, despite earnings trending downwards over past three years

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By buying an index fund, you can roughly match the market return with ease. But if you choose individual stocks with prowess, you can make superior returns. For example, Merck & Co., Inc. (NYSE:MRK) shareholders have seen the share price rise 71% over three years, well in excess of the market return (13%, not including dividends). On the other hand, the returns haven’t been quite so good recently, with shareholders up just 21%, including dividends.

On the back of a solid 7-day performance, let’s check what role the company’s fundamentals have played in driving long term shareholder returns.

See our latest analysis for Merck

To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it’s a weighing machine. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.

During the three years of share price growth, Merck actually saw its earnings per share (EPS) drop 22% per year.

So we doubt that the market is looking to EPS for its main judge of the company’s value. Given this situation, it makes sense to look at other metrics too.

It may well be that Merck revenue growth rate of 12% over three years has convinced shareholders to believe in a brighter future. If the company is being managed for the long term good, today’s shareholders might be right to hold on.

You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).

earnings-and-revenue-growth

Merck is a well known stock, with plenty of analyst coverage, suggesting some visibility into future growth. So it makes a lot of sense to check out what analysts think Merck will earn in the future (free analyst consensus estimates)

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. In the case of Merck, it has a TSR of 88% for the last 3 years. That exceeds its share price return that we previously mentioned. And there’s no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

Merck provided a TSR of 21% over the last twelve months. But that was short of the market average. On the bright side, that’s still a gain, and it’s actually better than the average return of 14% over half a decade It is possible that returns will improve along with the business fundamentals. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Consider risks, for instance. Every company has them, and we’ve spotted 4 warning signs for Merck you should know about.

We will like Merck better if we see some big insider buys. While we wait, check out this free list of undervalued stocks (mostly small caps) with considerable, recent, insider buying.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on American exchanges.

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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.