CVS Caremark Remains Neutral - Analyst Blog
March 01 2012 - 12:00PM
Zacks
Recently, we reiterated our Neutral recommendation on
CVS Caremark Corporation (CVS) with a target price
of $46.00.
CVS reported adjusted EPS of 89 cents in the fourth quarter of
2011 in line with the Zacks Consensus Estimate and 12.6% higher
than the year-ago quarter. For the full year, adjusted EPS rose
4.5% (5.9% excluding 2010 tax benefit) to $2.80, also matching the
Zacks Consensus Estimate.
CVS is gradually witnessing strong performance in the field of
Pharmacy Services. After a sluggish phase, the company has
exhibited improved performance in this segment for the fourth
consecutive quarter and has started off the 2012 selling season on
a positive note. With 90% of the contract renewals scheduled for
2012 already complete at the end of fiscal 2011, CVS’s retention
rate was as high as 98%.
New business wins stood at an encouraging level of $7.2 billion
(significantly up from the $6.8 billion as provided on its Analyst
Day on January 10, 2012). The company also won some new accounts,
which led to an increase in estimate for the number of new Medicare
Part D lives for 2012 to 200,000 lives, thus bringing the company’s
Medicare Part D prescription drug plans (PDP) lives up to
approximately 3.6 million to date.
The company also expects another $5.5 billion in new business
wins associated with the PDP acquisition from Universal American in
2011 and Universal American's (UAM) Medicare
Advantage plan.
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
2012.
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, Aetna and the rapidly growing
Specialty Pharmacy sector.
CVS also maintained its strong performance in the Retail segment
with a 2.5% increase in same-store sales, which touched the top end
of its guidance range (0.5%−2.5%) leading to a 4.0% climb in retail
revenues.
However, despite implementing diverse strategies to expand its
business, CVS continues to face margin pressure. Gross margin
during the reported quarter decreased 258 basis point (bps) year
over year to 19.6%. Moreover, operating margin contracted 60 bps to
6.9%.
In addition, the proposed merger between Express
Script (ESRX) and Medco (MHS) is expected
to further challenge CVS in the Pharmacy Services segment. The deal
is expected to combine two of the three largest US drug benefit
managers and create a dominant player in the PBM space that will
cover more than 150 million prescription drug consumers and 50% of
the large employer market.
Together with CVS, they are expected to cover approximately 240
million prescription drug consumers. Consequently, post-merger,
even CVS would not be able to stand in competition with combined
entity. We expect the merger to create market concentration in the
entire economy, leading to an anti-competitive landscape for
CVS.
CVS CAREMARK CP (CVS): Free Stock Analysis Report
EXPRESS SCRIPTS (ESRX): Free Stock Analysis Report
MEDCO HLTH SOL (MHS): Free Stock Analysis Report
UNIVL AMERICAN (UAM): Free Stock Analysis Report
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