Recently, we reiterated our Neutral recommendation on
CVS Caremark Corporation
) with a target price of $47.00.
CVS Caremark reported first quarter 2012 EPS of 59 cents, up
13.5% year over year. However, after excluding the impact of
certain one-time items from both the periods, adjusted EPS came in
at 65 cents, surpassing the Zacks Consensus Estimate of 63 cents
and up 14.0% year over year. Net revenue during the quarter
increased 19.9% year over year to $30.8 billion, marginally beating
the Zacks Consensus Estimate of $30.4 billion.
CVS is gradually witnessing strong performance in the field of
Pharmacy Services. After a sluggish phase, the company has
delivered improved performance in this segment for the fifth
consecutive quarter. Moreover, we are encouraged to note that the
company already completed 25% of its contract renewals scheduled
For the past few quarters, CVS maintained a high retention rate
(completed the last reported quarter with 98%). We expect CVS to
continue with this growth trajectory even in the forthcoming
period. For fiscal 2013, CVS estimates total contract renewal of
The company is also confident of achieving margin expansion in
2012. One of the primary reasons for this assumption is the huge
potential of generic drugs. The amount of branded drugs expected to
go off-patent in 2012 will be more than double than that recorded
in the past five years. Moreover, benefits from the company's
streamlining initiatives are expected to outweigh related costs in
The company is also planning to emphasize 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.
CVS also maintained its strong performance in the Retail segment
with an 8.4% increase in same-store sales. This huge retail growth
significantly benefited from the company's record market share gain
following the termination of the
Express Scripts Holding Company
) retail contract. The impasse between the two big players led to a
9.8% in CVS' pharmacy same-store sales. CVS also anticipates a
benefit of roughly 3 cents to 4 cents in the second quarter of 2012
from the non-renewal of the Walgreen and Express Scripts contract,
which is encouraging.
The company now expects the company's fiscal 2012 Retail
Pharmacy's operating profit to increase 10.5%-12.5% (8.5%-10.5%)
while that of the Pharmacy Services remained unchanged at 11%-15%.
The company reiterated its 2012 free cash flow and cash flow from
operations guidance of $4.6-$4.9 billion and $6.2-$6.4 billion,
However, despite implementing diverse strategies to expand its
business, CVS continues to face margin pressure. Gross margin
during the reported quarter decreased 185 basis point (bps) year
over year to 16.6%. Moreover, operating margin contracted 50 bps to
Moreover, the recent merger between Express Script and Medco has
thrown more challenges for CVS in the Pharmacy Services segment.
The deal combined two of the three largest US 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 remain apprehensive based on the huge and
growing market leading capacity of the merged entity compared to
We remain Neutralon the stock as we believe that most of the
positives are offset by the negative catalysts. The stock also
carries a Zacks #3 Rank (short-term Hold rating).
CVS CAREMARK CP (CVS): Free Stock Analysis
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