We have reiterated our Neutral recommendation on
CVS Caremark Corporation
) with a target price of $47.00.
CVS Caremark's second quarter adjusted earnings per share (EPS)
increased 14.0% year over year to 81cents, beating the Zacks
Consensus Estimate by 2 cents. Net revenues increased 16.3% to
$30.7 billion, nominally missing the consensus estimate.
CVS has now seen six consecutive quarters of strong performances
for Pharmacy Services. In spite of some contract losses in the
current selling season, net new business wins for 2013 stood at an
encouraging level of $640 million to date. The latest wins
include major Fortune 100 companies as well as regional health
plans in both the commercial and Medicare or Medicaid segments.
Moreover, CVS has taken steps to make prescription drugs more
affordable to consumers through programs such as Maintenance Choice
and Pharmacy Advisor.
CVS' retail segment continues to perform strongly, contributing
46% of the company's overall revenues in the second quarter of
fiscal 2012. The strength, which is evident from the higher
same-store sales during the last-reported quarter, benefited from
market share gains following the termination of the contract
Express Scripts Holding Company
). The stalemate between these two big players diverted many
customers from Express Scripts to CVS, which led to a 7.2% growth
in CVS' pharmacy same-store sales.
Also, we are impressed to note that, even with Walgreen
re-entering the Express Scripts network this September 15, CVS
remains optimistic about retaining at least 50% of the prescription
volumes gained from their earlier feud. Anticipating this, the
company expects a benefit of 5 cents per share to its bottom
The company now expects the Retail Pharmacy segment's operating
profit to increase by 14%-15% (previous guidance being 10.5%-12.5%)
while that of the Pharmacy Services to increase by 13%-15%
The company is also confident about achieving margin expansion
in 2012. One of the primary reasons for this assumption is the huge
potential of generic drugs. In the reported quarter, CVS' PBM
generic dispensing rate grew 390 bps to 78.0%.
However, despite implementing diverse strategies to expand its
business, CVS may face major difficulties with the recent
announcement of a multi-year retail pharmacy network agreement
between Walgreen and Express Script. We prefer to remain on the
sidelines until visibility improves in this regard.
Moreover, the recent merger between Express Script and Medco has
posed more challenges for CVS in the Pharmacy Services segment. The
deal combined two of the three largest U.S. drug benefit managers
and created a dominant player in the Pharmacy Benefit Management
(PBM) space to cover more than 150 million prescription drug
consumers and 50% of the large employer market. Consequently, we
remain apprehensive based on the huge and growing market leading
capacity of the merged entity compared to CVS. CVS carries a
Zacks #3 Rank (short-term Hold rating).
CVS CAREMARK CP (CVS): Free Stock Analysis
EXPRESS SCRIPTS (ESRX): Free Stock Analysis
WALGREEN CO (WAG): Free Stock Analysis Report
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