Merck & Co. (NYSE: MRK) and AbbVie Inc. (NYSE: ABBV) are two very different companies and face very different situations when it comes to earnings and growth, not to mention one is significantly older than the other. From 2009 to 2010, Merck's earnings fell by 14 times what they previously were but have made a comeback and have leveled out while AbbVie has only been public since 2013 and in its short history as a public has seen its earnings plunge by 20.31% annually. Merck's earnings have stayed consistent since its earnings recovered from 26 cents in December 2010 to $3.74 currently.
Merck EPS 2005 to 2015
2005 β $2.11
2006 β $2.02
2007 β $1.49
2008 β $3.63
2009 β $5.37
2010 βΓ 26 cents
2011 β $2.02
2012 β $1.99
2013 β $1.46
2014 β $4.09
2015 β $3.74
AbbVie EPS 2012 to 2015
2012 β $3.34
2013 β $2.56
2014 β $1.09
2015 β $1.69
When you compare the two company's earnings history, Merck has the advantage of being a public company much longer than AbbVie. AbbVie's EPS in its short life started out strong but ended up falling right out of the gate. Merck's earnings, on the other hand, have been positive but very volatile with no clear sign of consistent, sustained growth. AbbVie's future is harder to predict due to how new the company is as a public company, as the company's earnings are too unstable and currently in decline. While the company might have some merit, lack of strong earnings or a consistent upward trend shows that AbbVie's future earnings would be impossible to predict with any amount of accuracy.
Currently Merck is trading at $53.72 per share against earnings of $3.77 per share. If you paid $53.72 for a share of Merck, your initial rate of return would be 7.00% ($3.77 / $53.72 = 7.00%). AbbVie is currently trading at $60.86 per share against earnings of $1.72 per share. If you paid $60.86 for a share of AbbVie, your initial rate of return would be 2.8%.
In 2005 Merck had EPS of $2.11, while AbbVie was not public in 2005; in 2012 it had an EPS of $3.34. Ten years later in 2015, Merck has an EPS of $3.74 and AbbVie an EPS of $1.69. For Merck you get an annual compounding rate of 5.89% versus AbbVie's negative 20.31% compounded the last four years. From 2010 to 2015, Merck's earnings grew an astounding 70.44% compounded annually. These two numbers tell you several different things about each company. The first is that Merck has had a very high rate of earnings growth in the last five years than it did in the 10-year period from 2005 to 2015. The question that needs to be asked is: What caused this change? How did Merck's business economics change? What fueled its growth? The question that needs to be asked about AbbVie's demise is: What caused the earnings decline in the last five years after it went public?
From 2005 to 2015, Merck's net income grew from $4.631 billion to $10.78 billion, or at annual compounding rate of 8.82%%. In four years, AbbVie's net income declined from $3.433 billion to $2.817 billion, declining 4.82% annually for the last four years. In 2014 Merck had shareholders' equity of $17.43 per share and net earnings of $4.27 per share. This means that each share is yielding a 24.49% return on shareholders' equity ($4.27 / $17.43 = 24.49%), of which approximately 57.84% was retained by the company and 42.16% was to be paid out as a dividend to the shareholders. When you buy your Merck share with a per share equity value of $17.43, you can calculate that your investment would effectively earn a 24.49% return.
