MERIT MEDICAL SYSTEMS INC (MMSI) stock intrinsic value fair value estimate & owner earnings analysis

Merit Medical, based in South Jordan, Utah, makes single-use devices for interventional and diagnostic procedures. Its catalogue runs to thousands of items: catheters, guidewires, embolic agents, biopsy and drainage devices, custom procedure kits and products sold to other device makers, plus a smaller endoscopy line of stents and dilation products. Hospitals buy these items for every procedure, so sales follow procedure volumes. The advantage comes from range and habit rather than from any one patent. Sales were $1.516 billion in 2025, up 11.8%. About 40% of sales came from outside the United States, and China is the largest foreign market. How we measured earnings. We start from operating cash flow and remove working-capital swings. We subtract stock compensation as a real cost. We then subtract the capital spending needed to maintain the business, separating it from spending for growth such as the new South Jordan distribution centre built in 2025. Amortisation of acquired products, about $85 million in 2025, is added back automatically. Those product lines do wear out, though, so we charge that decay in the growth path, not in the earnings level. Measured this way, owner earnings were about $3.13 per diluted share in 2025 and $3.20 in 2024. Ten years earlier the figure was $0.79. Much of that rise was bought: the company has spent about $1.2 billion on acquisitions since 2016, and the share count rose from 45 million to 60 million. We value the business before its lenders. Adding back the roughly $21 million of cash interest gives a business cash flow of about $3.48 per share for 2025. The earnings level. Acquisitions in 2023 to 2025 changed the business: the AngioDynamics and Cook Medical product lines, EndoGastric Solutions, Biolife (StatSeal and WoundSeal) and the C2 CryoBalloon. So we measure from 2023, and the median of those three years gives a pre-interest level of about $210 million. Business cash flow fell 1.3% in 2025 because capital spending was higher. The base case therefore starts year one 1% lower, not higher. Base case (about $65 a share). We credit 3% annual growth for ten years. That is below the organic rate the business has shown through 2020's shutdown and China's price cuts, because procedure-driven consumables have grown steadily for a long time. We give no credit for future acquisitions, for the margin targets in the company's Continued Growth Initiatives program (which ends 31 December 2026), or for new products. After year ten we hold earnings flat rather than growing them. The acquired product lines age and must be replaced, and the company's record of replacing them with purchases is a cost rather than free growth. On this path the business is worth about $4.25 billion. Bear case (about $29 a share). We start at the 2023 earnings level of about $172 million. That assumes the gains of 2024 and 2025 fade as China's volume-based procurement keeps cutting prices; the company says it cannot forecast that process and expects the pressure to continue in 2026. In year three we include a downturn like the 2020 hospital shutdown. In the second quarter of 2020, sales fell 15% and operating profit swung from a $12 million profit to a $19 million loss. Here, business cash flow falls 40% for a year and recovers over the next two. After that, earnings drift down 1 to 2% a year as acquired lines age. The business is then worth about $2.18 billion. Bull case (about $87 a share). The business grows 5% a year through year seven and then 3.5%. That follows the organic rate of the last few years and assumes the new hemostasis, endoscopy and cryoablation lines hold up. The business is worth about $5.57 billion. What the company owes. The main debt is $747.5 million of 3% convertible notes due 1 February 2029, with principal repayable in cash. Cash was about $449 million at mid-2026. We treat about $100 million of that as needed to run the business. The low 3% coupon until 2029 is worth about $47 million. Net debt in the base and bull cases is about $352 million, or $5.85 a share: base $4.25 billion less $0.35 billion; bull $5.57 billion less $0.35 billion. The bear case assumes the notes are refinanced in 2029 at 7.5%, which raises net debt to about $440 million: $2.18 billion less $0.44 billion. Even in the downturn year, cash flow of about $103 million covers the interest bill several times over. A revolving credit line of up to $850 million, secured on substantially all assets, is undrawn, and its terms bar dividends. Changes since the previous analysis. Our earnings are now measured net of working-capital swings and separate growth spending from maintenance spending. The previous figures are therefore not comparable. On the business side: the founder, Fred Lampropoulos, stepped down as chief executive in October 2025 and Martha Aronson succeeded him. The company sold the DualCap line for $28 million in February 2026 and spent another $93 million on acquisitions in the first half of 2026. Margin-of-safety price. We are fairly confident of the earnings level. Three years of filings agree with it, and a broad catalogue of procedure supplies does not swing much outside a shutdown. The worst plausible outcomes are a pricing reset spreading from China to other national tenders, a product recall, or a costly acquisition that fails under a new chief executive. The business would survive all of these. It has no customer concentration, and its one debt maturity is small relative to cash and cash flow. The shares would be worth well under $65 in two cases: if the 2024-25 gains are a peak, which puts value near $45, or if acquired lines need even more spending to replace. The business pays no dividend, so the return has to come from value catching up within a few years. The margin-of-safety price is $32, which represents about $3.10 of owner earnings per share, a 10% yield, with roughly bear-case value beneath it. If the base case plays out, the shares should be worth about twice that within four years, which is what the 20% annual target requires. If the bear case plays out, the implied loss is limited.