Merck Earnings Preview: First Quarter 2009

Merck [[MRK]] is scheduled to report first quarter 2009 results before the market opens on Tuesday, April 21. Based on our analysis, we at are expecting MRK to report better than expected results that exceed Wall Street’s consensus expectations.


Analyst Expectations

We are forecasting revenues of $5.90 billion and EPS of $.80. This would represent a 1% increase in revenues from last year’s $5.82 billion in the same period. The current analyst consensus estimates calls for revenues of $5.79 billion and $.77 EPS. On February 3, the company reaffirmed their 2009 full year guidance of $23.7 – $24.2 billion in revenues and Non-GAAP EPS of $3.15 – $3.30.


While we are expecting Merck to report another great quarter, the real story will be their acquisition of Schering-Plough [[SGP]] and the increasing consolidation within the pharmaceutical industry. On March 6, the company entered into a definitive agreement to purchase Schering-Plough for $41 billion. The acquisition is expected to be completed in the second half of 2009.


Merck’s top line growth has slowed in recent years and Wall Street is now expecting revenues to be flat in both 2009 and 2010. The acquisition of SGP will provide Merck with a more diversified product offering and a potential growth impetus.


Share Performance

Merck’s shares are down over 14% since the beginning of the year. In 2008, Merck’s shares fell over 47%, as it underperformed both the Dow Jones index as well as the other major pharmaceutical stocks.



Shares are now trading at 8x consensus 2010 EPS estimates. This is inline with the relative valuations of their peer group. We view the SGP transaction as a positive for the stock and believe the current share price undervalues Merck’s long term prospects.


Recommendation: Buy with a $35 price target.


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