U.S. Markets closed

All-Front Beat for CVS, Up Y-Y

Zacks Equity Research

CVS Caremark (CVS) reported fourth-quarter 2012 EPS of 90 cents, up 11.1% year over year. However, excluding the loss on early extinguishment of debt in the fourth quarter of 2012 and other one-time expenses, the adjusted EPS came in at $1.14, representing a beat of 3.6% over the Zacks Consensus Estimate. This reflects the fourth consecutive quarterly earnings beat for CVS.

Adjusted EPS in 2012 (excluding the loss on early extinguishment of debt) was $3.43, edging past the Zacks Consensus Estimate by 1.2%.

Net revenue increased 10.9% year over year to $31.4 billion in the quarter, surpassing the Zacks Consensus Estimate of $31.1 billion. Total revenues in 2012 surged 15% from the prior year to $123.1 billion beating the corresponding Zacks Consensus Estimate of $122.8 billion.

The Pharmacy Services segment posted a robust 17.4% increase in revenues to $18.6 billion in the fourth quarter. CVS benefited from client additions during the 2012 selling season, drug cost inflation and growth in the Medicare Part D program.

The higher claims related to Medicare Part D program and client wins also led to 6.5% year-over-year growth in CVS’ pharmacy network claims to 205.5 million. The new client gains and ongoing adoption of the Maintenance Choice program increased the Mail Choice claims processed to 20.4 million, up 14.6% on a year-over-year basis.

Revenues from CVS’ Retail Pharmacy improved 5.1% year over year to $16.3 billion. Same-store sales increased 4% while front-end same store sales grew 3.9% year over year.

Favorable calendar day shifts during the fourth quarter with an additional Monday and one lesser Saturday improved pharmacy same-store sales by roughly 80 basis points (bps). However, the generic wave in the pharmaceutical industry negatively affected the pharmacy same-store sales by 11 percentage points.

Moreover, counting 90-day scripts as one script, pharmacy same-store prescription volumes climbed 9% from the year-ago quarter. When 90-day scripts were converted into 3 scripts, same-store prescription volumes increased 11% from the prior-year quarter.

The generic dispensing rate (the proportion of all generic prescriptions to total number of prescriptions dispensed) soared 500 bps to 80% in the Pharmacy Services segment and 400 bps to 79.9% in the Retail Pharmacy segment.

Gross margin expanded 44 bps to 20.1% on the back of higher profitability across both segments. Operating expenses were up 11% on a year-over-year basis to roughly $4 billion in the quarter. However, operating margin increased 40 bps to 7.3%.

CVS exited 2012 with cash and cash equivalents of $1.38 billion, down 2.7% from 2011. Annual net cash provided by operating activities increased 13.9% to $6.7 billion. This resulted in free cash flow of almost $5.2 billion in 2012, up approximately 13% from the prior year.

During the fourth quarter, CVS opened 37 new retail drugstores, closed 2 retail drugstores and relocated 8 retail drugstores. As of Dec 31, 2012, CVS operated 7,525 locations, which include 7,458 retail drugstores, 19 onsite pharmacies, 31 retail specialty pharmacy stores, 12 specialty mail order pharmacies and 5 mail order pharmacies in 45 states, as well as the District of Columbia and Puerto Rico.


Anticipating a benefit of 2 cents per share from the debt tender offer and refinancing during the fourth quarter, CVS expects adjusted EPS of $3.86 − $4.00 for 2013. The current Zacks Consensus Estimate of $3.91 lies within the guidance range.

The company envisages 2013 free cash flow and cash flow from operations in the range of $4.8 – $5.1 billion and $6.4 – $6.6 billion, respectively. The guidance includes the completion of the accelerated share repurchase agreement of $4 billion.

For the first quarter of 2013, CVS expects adjusted EPS in the band of 77 and 80 cents. The current Zacks Consensus Estimate of 78 cents is within the company’s outlook.

Our Take

A profound mix of favorable industry dynamics, benefits from client wins from the earlier Walgreens (WAG) and Express Scripts (ESRX) impasse and increasing shareholder value continue to drive growth at CVS.

In light of these facts, the estimate revision trend reflects a bullish sentiment toward the company. Accordingly, the stock carries a Zacks Rank #2 (Buy). Besides CVS, ResMed (RMD), carrying a Zacks Rank #1 (Strong Buy), is also expected to do well and warrants a look.

Read the Full Research Report on CVS

Read the Full Research Report on RMD

Read the Full Research Report on ESRX

Read the Full Research Report on WAG

Zacks Investment Research

More From Zacks.com