Following the third quarter earnings release, we reaffirm our
long-term 'Neutral' recommendation on
), the largest provider of prescription and related health care
services in the U.S.
CVS CAREMARK CP (CVS): Free Stock Analysis
EXPRESS SCRIPTS (ESRX): Free Stock Analysis
WALGREEN CO (WAG): Free Stock Analysis Report
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The company surpassed bottom-line Zack Consensus Estimate for the
ninth successive time in the third quarter. Adjusted EPS
increased 21.4% year over year to 85 cents, beating the Zacks
Consensus Estimate by a penny. Net revenues increased 13.3% to
$30.2 billion, on the back of solid growth across both operating
Although the company continues to witness retail sales growth,
helped by market share gain, we are concerned about the
) resolution in July which may create distress for CVS Caremark.
While we derive comfort from the fact that CVS Caremark's
pharmacy benefit management franchise continues to gain foothold,
we are wary that the merger of Express Scripts and Medco has put
CVS Caremark in a tight spot.
Several drugs (recording annual U.S. sales of about $100 billion)
are losing their patent rights through 2016, allowing for vast
market proliferation and incremental sales. Riding the generic
wave, CVS Caremark is perfectly on track to continue positive
growth performance through 2012 and beyond. Demographic trends in
the domestic market should drive utilization rates for years to
Despite being confident of achieving margin pressure expansion in
2012, CVS Caremark continues to face margin pressure. While gross
margin contracted 73 basis points in the third quarter, operating
margin was flat on a year-over-year basis.
Based on an encouraging 2012 selling season, the expectation to
retain at least 60% clients and an expected benefit from
accelerated share buybacks, CVS Caremark raised its 2012 earnings
per share guidance during the most recent earnings release. The
company now expects adjusted earnings per share of $3.38−$3.41
(earlier guidance being $3.32−$3.38).
The current Zacks Consensus Estimate of $3.37 remains below the
company's guidance range. Concerns remain that the company
may find it challenging to retain 60% of the prescriptions gained
from the Walgreen and Express Scripts impasse, given the current
trends. Moreover, efforts to retain clients might hurt margins,
which are already under pressure.
While CVS Caremark still appears to be a safe bet, we remain on
the sidelines owing to macro as well as company-specific
headwinds. The stock currently carries a short-term Zacks #3 Rank