Earnings Preview : Medco Health - Analyst Blog
July 20 2011 - 5:15AM
Zacks
Medco Health Solutions
Inc. (MHS) is scheduled
to release its second-quarter 2011 earnings on July 21, 2011 before
the market opens. The company is expected to report EPS of 94 cents
on revenues of $17.08 billion during the quarter, according to
Zacks Consensus Estimates.
With respect to earnings surprises,
Medco has exceeded the expectations in three out of the trailing
four quarters. During the fourth quarter of fiscal 2010, the
company reported in line results. The company has positive average
earnings surprise of 2.70%.
Along with the first quarter
results, Medco raised its guidance for fiscal 2011 based on solid
growth across all its segments. The company expects to deliver
adjusted EPS in the range of $4.02-$4.12 (previous range of
$3.80-$3.93) representing growth of 13%–16%.
Previous Quarter
Highlights
Medco reported an EPS of 80 cents
during the first quarter of fiscal 2011, up 19.4% from the year-ago
quarter level of 67 cents. After adjusting for amortization of
intangible assets, the company’s EPS came in at 91 cents, beating
the Zacks Consensus Estimate of 88 cents and 19.7% higher than the
year-ago quarter’s 76 cents.
Medco reported revenues of $17.0
billion, up 4.3% year over year but marginally missing the Zacks
Consensus Estimate of $17.1 billion. The increase in revenues was
primarily driven by contributions from significant client wins as
well as higher prices charged on branded drugs, partially offset by
higher volumes of lower-priced generic drugs.
During the quarter, Medco witnessed
a 57.5% year-over-year growth in service revenue to $357.8 million
primarily attributable to the acquisition of United BioSource and
growth in its client service offerings. Revenues from Medco’s
specialty pharmacy segment, Accredo Health Group, increased 14.9%
to $3.1 billion primarily due to significant client addition and
organic growth across the business.
Agreement of
Analysts
Analysts’ estimate revision
trends are insignificant for the for the past one month. Over the
last 30 days, 1 out of the 24 analysts covering the stock pulled
down the estimates for the quarter ended June. Further, 1 analyst
decreased the estimate over the last 7 days. None of the analysts
made an upward revision over the last 30 days and 7 days. The same
trend was noticed for fiscal 2011.
However, we notice a perfectly
reversed trend for the third quarter, where 1 analyst out of 23 has
increased the estimate in the 30 days and 1 has made a upward
revision over the last 7 days. The Zacks Consensus Estimate
for the third quarter is pegged at $1.06 cents per share.
Concerns remain on the pending
renewal of Medco’s lcontract with UnitedHealth
(UNH). This is significant as the largest pharmacy benefit
management (PBM) represents the largest at Medco as well as
successive contract losses in recent times. Under the current
agreement with UnitedHealth, Medco will provide PBM services till
December 2012. The company expects to initiate discussions
regarding the renewal in the second half of 2011. Although Medco is
confident about the renewal, the company will suffer a major blow
if the situation turns around. We expect further clarity from
the company on this front.
Further, in May 2011, Medco lost
its integrated PBM contract with Blue Cross and Blue Shield for the
Government-wide Service Benefit Plan or Federal Employee Program
(FEP) to CVS Caremark (CVS). This is a major set
back for Medco as this contract generated nearly $3 billion in
annual revenues (including approximately 9.8 million mail order
prescriptions) or about 4.5% of the company's total sales in 2010.
Further, contribution of the contract to the company’s 2011
earnings guidance is around 10%.
Furthermore, with the acquisition
of the Medicare Part D business of Universal American by CVS
Caremark, the former’s contract with Medco was terminated,
effective 2012. We believe these contract losses will induce
Medco to reduce its guidance for fiscal 2011. We also believe that
the company will implement effective strategies to revive its PBM
growth.
Magnitude of Estimate
Revisions
The magnitude of revisions is
insignificant over the past one month. Overall, estimates for the
second quarter remained unchanged at 94 cents per share in the last
7 and 30 days. A similar trend can be seen for 2011, with estimates
remaining at par with the current level of $4.10 per share.
Our
Recommendation
Despite all the recent headwinds,
we believe Medco is well positioned to capitalize on inherent
sector tailwinds such as increasing prescription trends, a mix
shift toward mail order distribution, the aging baby boomers
population, and significant brand-name drug patent expirations over
the next few years. The company is expected to witness higher
service revenue growth on the back of United BioSource acquisition.
In addition, under the specialty segment, Accredo's performance is
expected to remain strong primarily aided by significant client
additions and organic growth across the business. The company has a
strong balance sheet that augurs well for further acquisitions.
We currently have a Neutral
recommendation on the stock, which corresponds to the Zacks #3 Rank
(Hold).
CVS CAREMARK CP (CVS): Free Stock Analysis Report
MEDCO HLTH SOL (MHS): Free Stock Analysis Report
UNITEDHEALTH GP (UNH): Free Stock Analysis Report
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