Merck (NYSE:MRK) has had a string of tough breaks this year. We'll get a closer look at whether its turnaround is imminent when it releases earnings on the other side of the weekend, but until then, here's a preview of what to expect.

What analysts say:

  • Buy, sell, or waffle? Analysts are split on whether the company is a good buy at these prices, with eight of 16 giving a green light and the other eight offering the not-so-sure hold sign.
  • Revenue. No increases here; the average analyst sees revenue falling 1% year over year, to $6.04 billion.
  • Earnings. The bottom line could see some increases, according to analysts, who are looking for a penny increase over last year's second quarter to $0.83 per share.

What management says:
"Don't worry, we'll be OK" seems to be management's mantra these days. At first, it was believable: The company was predicting that it could raise earnings this year even as it lost marketing exclusivity of its osteoporosis blockbuster Fosamax. Now, with the Enhance trial affecting sales of Vytorin and Zetia and hopes for a replacement for the cholesterol drugs waning, it's a little less convincing.

What management does: 

Margins

12/31/2006

3/31/2007

6/30/2007

9/30/2007

12/31/2007

3/31/2008

Gross

76.7%

75.9%

75.4%

76.1%

76.6%

77.4%

Operating

26.3%

25.3%

24.5%

25.2%

25.8%

26.5%

Net

19.6%

20.1%

20.5%

22.4%

13.5%

20.1%

FCF/Revenue

25.6%

13.7%

16.7%

22.5%

24.7%

40%

 

Growth (YOY)

12/31/2006

3/31/2007

6/30/2007

9/30/2007

12/31/2007

3/31/2008

Revenue

2.8%

4.2%

4.3%

7.3%

6.9%

5.5%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

As we saw with Johnson & Johnson, margins at a large company like Merck just don't move around that much. Revenue has kept growing at a slow but steady pace. There's little sign of major improvement in these numbers.

What Fools say:
CAPS players haven't given up on the pharmaceutical company quite yet. Here's how Merck rates against some of its peers and competitors:

 

Market Cap (millions)

Trailing P/E Ratio

CAPS Rating (out of 5)

Merck

$79,336

16.6

****

GlaxoSmithKline (NYSE:GSK)

$124,397

12.9

****

Abbott Labs (NYSE:ABT)

$88,740

23.3

****

Pfizer (NYSE:PFE)

$124,412

16.5

***

Schering-Plough (NYSE:SGP)

$35,882

--

****

Data taken from Motley Fool CAPS and Capital IQ on 7/17/2008.

In fact, many Fools think Merck's stock may have bottomed out. CAPS member Guffdogg is quite excited about Merck's recent troubles:

Merck is way too beaten down by bad press. This company has strong fundamentals which will be rewarded now that Big Pharma is fashionable again! Yeeehaw!

One Fool says:
Personally, I think the aftermath of the Enhance trial is way overblown. Sure, Vytorin didn't reduce plaque in arteries compared to a generic statin, but it still lowered cholesterol levels more than the statin, which seems like a good enough reason to continue prescribing it until the drugs' effect on heart attacks (which is what patients and their doctors really care about) is available. Unfortunately for Merck and Schering-Plough, I'm not the one writing the prescriptions.

The good news is that Merck is far from a one-trick pony, so it's got plenty of other drugs in its arsenal to balance out the lack of growth from its cholesterol-drug franchise. How quickly the turnaround happens will depend on how fast it can grow sales of diabetes drugs Januvia and Janumet, HIV drug Isentress, and HPV vaccine Gardasil.

The company has already shown that it’s a comeback kid, since it recovered nicely from the loss of Vioxx. Investors buying at this level may not get the lowest price, but they'll likely be buying a long-term winner -- and at least they can enjoy a nice 4% dividend yield while they wait.