Impressive Q2 for CVS, Adjusted Medicaid Rate Adds to Margin - Analyst Blog

On Aug 12, 2014, we issued an updated research report on CVS Caremark Corporation ( CVS ). Following an unimpressive first quarter, CVS Caremark is back in form with second quarter beats on both EPS and revenue fronts.

Adjusted earnings per share (EPS) shot up 16.5% year over year to $1.13. The EPS number also surpassed the Zacks Consensus Estimate by 3 cents as well as the company-provided guidance range of $1.08 to $1.11. Net revenue on the other hand, increased 10.7% to $34.6 billion, edging past the Zacks Consensus Estimate of $33.41 billion.

The Pharmacy Services segment was positively impacted by growth in specialty pharmacy and favorable purchasing economics. Likewise, the Retail Pharmacy segment benefited from increased sales and an improved margin rate, partially offset by incremental store operating costs associated with operating more stores. As expected, the finalization of Medicaid reimbursement rate reduction had a positive impact on the company's pharmacy margins in the second quarter.

The company continues to benefit from a strong selling season, favorable industry dynamics and increasing shareholder value. Further, the generic wave in the pharmaceutical industry continues to improve profitability for CVS.

Despite tough pricing competition, CVS is gaining substantially owing to its 2015 selling season. Gross win for 2015 is pegged at 5.4 billion and has spread across all client segments while net new business stands at 2.6 billion. This net new number includes business lost through acquisition, which makes up more than 60% of the lost business. The company has also completed renewal of approximately 70% of the 26 billion in business up for renewal with a retention rate of almost 97%.

Specialty revenues rose roughly 53% in the second quarter on the back of drug price inflation, utilization, new product launches and new client wins. According to the company, clients specialty now represents about 22.5% of total drug spend and is expected to grow at a mid-teens rate and reach 50% by 2018.

However, the company is facing higher costs associated with its Medicare Part D business that might hamper operating profit within the PBM franchise. The somber macroeconomic condition also adds to our concern.

The stock currently carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

Some better-ranked stocks in the broader healthcare industry include Abaxis, Inc. ( ABAX ), Medtronic, Inc. ( MDT ) and NuVasive, Inc. ( NUVA ). All the three stocks carry a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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