Earnings Scorecard: CVS Caremark - Analyst Blog
November 15 2011 - 6:45AM
Zacks
Subsequent to the announcement of
CVS Caremark’s (CVS) third quarter 2011 results on
November 3, 2011, we witness a mixed trend in the analysts’
estimate revisions.
Street analysts have had nearly a
week to ponder over the news. In the subsequent paragraphs, we will
cover the recent earnings announcement, subsequent analysts’
estimate revisions as well as the Zacks Rank and long-term
recommendation on the stock.
Third Quarter
Highlights
CVS Caremark reported EPS of 65
cents in the third quarter, up 8.3% year over year. However, after
excluding the impact of certain one-time items, adjusted EPS came
in at 70 cents, surpassing the Zacks Consensus Estimate of 67 cents
and 9.3% higher than the year-ago level.
Net revenue increased 12.5% year
over year to $26.7 billion, almost in line with the Zacks Consensus
Estimate, primarily due to strong performance of the Pharmacy
Services segment. The segment recorded a robust 25.8% increase in
revenues to $14.8 billion during the reported quarter. The
significant growth was primarily on the back of the long-term
contract with Aetna (AET) as well as the
acquisition of the Medicare Part D business of Universal
American Corp. (UAM).
Moreover, benefits from the
company’s streamlining initiatives are expected to outweigh related
costs in 2012. The company eyes further progress in the PBM segment
based on its new business wins and strong client retention. By the
end of the third quarter, the company completed more than 70% of
2012 renewals, which include AT&T, General Electric and a FEP
Retail Contract worth $4 billion.
Based on a solid quarter, CVS
Caremark updated its EPS outlook for fiscal 2011. The company now
expects adjusted EPS of $2.77–$2.81 (earlier guidance being
$2.75–$2.81). The guidance for cash flow from operations and free
cash flow for fiscal 2011, however, remained unchanged at $5.5–$5.6
billion and $4.0–$4.2 billion, respectively.
For a full coverage on the
earnings, read:CVS Posts a Strong Quarter
Agreement of
Analysts
Estimate revision trends for the
upcoming fourth quarter of fiscal 2011 and the first quarter of
fiscal 2012 depicted the analysts’ mixed sentiments.
Over the past 30 days, 6 of the 16
analysts covering the stock have made downward revisions while 3
analysts raised their estimates for the fourth quarter. Besides,
estimates for fiscal 2011 were raised by 13 analysts while none
moved in the opposite direction. For the first quarter of fiscal
2012, only one analyst raised the estimate while 2 reduced the
same.
After several quarters of declining
revenues resulting from the disappointing results in the PBM
segment, the analysts are encouraged by the improved performance of
CVS Caremark’s Pharmacy Services segment for the third consecutive
quarter.
Although concerns linger given the
margin pressure, the analysts are confident about CVS Caremark’s
longer-term potential, based on its retail execution, deployment
potential and strong 2012 generics cycle. Moreover, the firms
believe the healthcare reform will open up new avenues for the
company. Alongside, CVS Caremark is looking to benefit from the
ongoing Walgreen (WAG) -Express
Script (ESRX) dispute for retail contract
renewal.
However, the analysts with a
bearish outlook are concerned based on the proposed
Medco (MHS) -Express Script merger, which is
expected to throw more challenges for CVS Caremark in Pharmacy
Services segment. The deal would combine two of the three largest
US drug benefit managers and create an industry leader that holds
over one-third of the market.
Magnitude of Estimate
Revisions
In the past 7 days, the magnitude
of estimate revisions for the fourth quarter of 2011, fiscal 2011
and first quarter 2012 remained unchanged at 89 cents, $2.80 and 63
cents, respectively.
Our
Recommendation
During the third quarter of 2011,
improved performance was observed in the Pharmacy Services segment
for the third consecutive quarter. CVS Caremark is also adopting
several strategies to ensure consistent growth in its business. We
are encouraged by its several recent contract wins, which would
help maintain the growth momentum in coming years. Also, the
company intends to take advantage of the ongoing Walgreen-Express
Script dispute, which if successful will further bolster its Retail
segment. However, margins continue to remain under pressure. We
reiterate a Neutral recommendation on the stock.
CVS Caremark holds a Zacks #2 Rank,
implying a short-term Buy rating on the stock. Besides, the company
retains a long-term Neutral recommendation on the stock.
About Earnings Estimate
Scorecard
Len Zacks, PhD in mathematics from
MIT, proved over 30 years ago that earnings estimate revisions are
the most powerful force impacting stock prices. He turned this
ground breaking discovery into two of the most celebrating stock
rating systems in use today. The Zacks Rank for stock trading in a
1 to 3 month time horizon and the Zacks Recommendation for
long-term investing (6+ months). These “Earnings Estimate
Scorecard" articles help analyze the important aspects of estimate
revisions for each stock after their quarterly earnings
announcements. Learn more about earnings estimates and our proven
stock ratings at http://www.zacks.com/education/
AETNA INC-NEW (AET): Free Stock Analysis Report
CVS CAREMARK CP (CVS): Free Stock Analysis Report
EXPRESS SCRIPTS (ESRX): Free Stock Analysis Report
MEDCO HLTH SOL (MHS): Free Stock Analysis Report
UNIVL AMERICAN (UAM): Free Stock Analysis Report
WALGREEN CO (WAG): Free Stock Analysis Report
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