TSC Ratings' Updates: MasterCard

We've downgraded Merck(MRK Quote), which provides products for human and animal health, from buy to hold. Strengths include its largely solid financial position with reasonable debt levels by most measures, expanding profit margins and notable return on equity. However, as a counter to these strengths, we also find weaknesses including weak operating cash flow, deteriorating net income and a generally disappointing performance in the stock itself.

The current debt-to-equity ratio, 0.35, is low and is below the industry average, implying successful management of debt levels. Although the company had a strong debt-to-equity ratio, its quick ratio of 0.73 is somewhat weak and could be cause for future problems. The gross profit margin is currently very high, coming in at 82.30%, but it has managed to decrease from the same period last year. The net profit margin of 18.40% trails the industry average. Revenue dropped by 2.1% since the same quarter last year, and EPS decreased. Net operating cash flow has decreased to $1,652.00 million, or 45.40% compared with the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.

Shares are down 55.5% on the year, underperforming the S&P 500, and EPS are down 27.1% compared with the year-earlier quarter. Naturally, the overall market trend is bound to be a significant factor, and in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.