CVS Beats by a Penny, Guidance Weak - Analyst Blog

CVS Caremark(CVS) reported an adjusted EPS of 80 cents in the fourth quarter of fiscal 2010, beating both the Zacks Consensus Estimate and the year-ago period by a penny. For the full year, the adjusted EPS of $2.69 was in line with the Zacks Consensus Estimate. However, the EPS declined compared to the previous year's $2.74.

Revenues decreased 4.1% year over year to $24.8 billion as its Pharmacy Services segment still disappoints. However, revenues marginally missed the Zacks Consensus Estimate of $24.9 billion. For the full year, revenues declined 2.3% to reach $96.4 billion, missing the Zacks Consensus Estimate of $96.6 billion. A 3% decline in share count had a favorable impact on the bottom line. 

The Pharmacy Services segment recorded a 9.7% decline in revenues during the quarter to reach $12.2 billion, driven by the termination of some large contracts (effective since January 2010) announced by the company earlier. In addition, the coverage of Medicare Part D program shrunk due to the 2010 competitive bidding process, partially offset by new client wins. However, after adjusting for the recent generic introductions, the decline in revenues would be less at 2.4%.

Revenues from CVS's other segment, Retail Pharmacy, increased 3.1% to $14.9 billion during the quarter with a 1.7% increase in total same-store sales. While pharmacy same-store sales rose 2.0%, front-end same-store sales increased 1.0%.

Pharmacy Services same-store sales were negatively impacted by 250 basis points due to recent generic introductions, whereas the Maintenance Choice program had a positive impact of 220 basis points. Generic dispensing rate increased in the Pharmacy Services and Retail Pharmacy segments by 390 basis points to 72.8% and 320 basis points to 73.8%, respectively.

Guidance

CVS also provided its outlook for 2011. The company expects to report adjusted EPS of $2.72−$2.82, way below the Zacks Consensus Estimate of $2.88. In addition, the company expects to generate $4-$4.2 billion of free cash flow.

CVS has taken into account the proposed acquisition of Universal American's (UAM) Medicare Part D business and costs related to the streamlining initiatives of the Pharmacy Services segment. The proposed acquisition is expected to be closed in the second quarter this year.

Recommendation

Although the Pharmacy Services segment has been a drag on the company's performance for the last few quarters, CVS is undertaking measures to get it back to the growth path. Moreover, the recent acquisition of the Medicare Part D business is a good move by the company to boost its PBM segment. With a strong balance sheet, it rewards shareholders through repurchases and dividends.

We are currently ‘Neutral' on the stock.

 
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