Welcome to the Stock of the Day.

There have been some interesting developments over at one of the biggest names in healthcare, Merck  (MRK), that recently sent shares soaring. I’d like to take a look at what’s happening with this giant company and what it could mean for investors.

Let’s jump right in.

Company Profile

Although the Merck name stretches back to 1891, the company as we know it was created in 2009 when Merck and Schering-Plough merged to create the second-largest healthcare company in the world.

The company boasts a diverse portfolio of medical treatments and products, including vaccines, prescription drugs and pet meds. And the company is also behind a number of wildly popular consumer products, including Dr Scholl’s gel inserts and orthotics, Lotrimin Athlete’s Foot treatment and A+D ointment.

Earnings Buzz

Looking ahead to next month’s earnings announcement, the analyst community is being somewhat cautious. Currently, the consensus calls for Merck’s quarterly sales to decline 3.2% (compared with a year ago) and earnings to rise 6%.

In fact, the consensus earnings estimate has fallen 2 cents per share in the past three months. This is not a good sign, but it doesn’t mean this is the end of the line for the company. This situation happened last year as well and MRK managed to beat estimates and shares have been on a solid run. And recently the company announced that it has some new blood in the organization.

Specifically, a former top scientist from Amgen (AMGN) has come aboard to cut programs that are underperforming and keep the labs focused on the biggest breakthroughs. While this won’t impact the current quarter’s numbers, if the company can beat estimates and show that it’s taking steps to bigger breakthroughs it should put additional buying pressure under the stock.

Competition Breakdown

Merck’s main competitors are GlaxoSmithKline Plc (GSK) and Pfizer (PFE), as well as Eli Lilly (LLY) and Bristol-Myers Squibb (BMY). All are leaders of the drug industry in their own right. But when you go to plug them into Portfolio Grader, GSK gets a nearly identical grade as MRK while LLY is a D and PFE is a C.

The only real threat in terms of fundamental strength is BMY—and BMY has outperformed MRK over the last year.

Current RatingsmERmM

Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. MRK is coming off of a rough summer/fall when it comes to my rating of the company. I had the stock as a hold or a sell over that time and only recently (in December) moved the stock to a buy.

And honestly, Merck could stand to improve its fundamentals: five of the eight metrics I graded it on scored at a C (or lower!). This includes sales growth, operating margin growth, earnings growth, earnings surprises and earnings momentum. The two main metrics that Merck scored well on were cash flow and return on equity, so it also receives a C for its Fundamental Grade.

Bottom Line: As of this posting I consider MRK a cautious B-rated Buy.

Would you like to check the fundamentals backing up one of your stocks? For more stock grades, please visit my Portfolio Grader website!