On Jun 3, 2013, we reaffirmed our Neutral recommendation on CVS Caremark Corporation (CVS) following healthy first-quarter 2013 results. While this integrated pharmacy service provider recorded robust EPS growth, it witnessed a slowdown in segment growth with clambering revenues. The stock carries a Zacks Rank #3 (Hold).
Why the Reiteration?
On May 1, CVS reported first-quarter adjusted EPS of 83 cents, reflecting a robust hike of 28.1% year over year. The result beat the company’s expectation of 77−80 cents as well as the Zacks Consensus Estimate of 79 cents. However, net revenue decreased 0.1% year over year to $30.8 billion in the quarter. Nonetheless, revenues were ahead of the Zacks Consensus Estimate of $30.3 billion.
While Pharmacy Services revenues improved 0.1%, Retail Pharmacy revenues inched up 0.2% year over year as introduction of generic drugs continue to drag segment revenues. Nevertheless, CVS reported healthy margin expansion on the back of higher profitability across both segments due to generic introductions.
We believe that the resolution of the contractual dispute between Walgreens (WAG) and Express Scripts Holding Company (ESRX) might act as a headwind for CVS. While CVS continues to retain 60% of the scripts gained during the impasse, the company might lose momentum due to increasing return of customers at Walgreens store.
While the tussle for market share with the retail giant raises concern, CVS also continues to lag Express Scripts in Pharmacy Business Management (PBM). The situation is not likely to improve in 2013. Adding to our concerns, macroeconomic conditions remain unyielding.
Notably, CVS faces favorable industry dynamics which are expected to drive utilization rates for years to come. The company should gain from several growth catalysts such as domestic demographic trends, increasing number of lives covered following the healthcare reforms and soaring demand for specialty pharmacy among others. As a result, CVS is well poised to record positive growth performance for both segments.
While we remain on the sidelines for CVS, drug retailer Rite Aid Corporation (RAD), carrying a Zacks Rank #2, warrants a look.
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