Recently, we have reiterated our Neutral recommendation on
CVS Caremark Corporation
), which is supported by our target price of $49.00.
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CVS' retail segment continues to perform strongly, contributing 53%
of the company's overall revenues in the first 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 between
Express Scripts Holding Company
). The impasse between the two big players diverted many customers
from Express Scripts to CVS, which led to a 9.8% growth in CVS'
pharmacy same-store sales. CVS now anticipates a benefit of roughly
3 cents to 4 cents in the second quarter of 2012 from this
non-renewal, which is encouraging.
The company's Pharmacy Services business is also doing well. The
segment, which made up 47% of total revenue in the last quarter,
has now improved performance for the fifth consecutive quarter. CVS
has completed 25% of its contract renewals scheduled for 2013 (in
line with normal trends), indicating that the business remains on
CVS has maintained a high retention rate (98% in the last-reported
quarter) over the last few quarters and we expect it to maintain
this trend going forward. For fiscal 2013, CVS estimates total
contract renewals of $14.5 billion.
We are also positive about CVS' plans to focus on its key-growth
areas, such as Universal American's PDP Businesses, Maintenance
choice and Pharmacy Advisor programs and the rapidly-growing
Specialty Pharmacy sector.
The company is also confident about margin expansion this year. One
of the primary reasons we agree that this is possible is the huge
potential of generic drugs. The amount of branded drugs expected to
go off-patent in 2012 will be more than double that recorded in the
past five years.
Moreover, benefits from the company's streamlining initiatives are
expected to outweigh related costs in 2012.
However, although CVS has consistently posted encouraging results,
the recent merger between Express Script and Medco has created 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 that will cover more than 150 million prescription drug
consumers and 50% of the large employer market. Consequently, we
expect competitive pressures to increase, as the merged entity is
likely to become a major force in the market.
To get further clarity on this, we eagerly await CVS' second
quarter fiscal 2012 earnings announcement, which is slated to
release on August 6, 2012 before the market opens.
The stock carries a Zacks #3 Rank (short-term Hold rating).