CVS Beats Estimates, Reaffirms

CVS Caremark (CVS) reported first-quarter fiscal 2011 earnings per share of 52 cents compared with 55 cents of the year-ago quarter. However, after excluding the impact of certain one-time items, the adjusted earnings per share came in at 57 cents, beating the Zacks Consensus Estimate of 55 cents but trailing the year-ago quarter’s adjusted earnings of 60 cents.

Reported net profit fell 7.5% year over year to $713 million during the quarter due to higher costs. Net revenues increased 8.9% year over year to $25.9 billion, also ahead of the Zacks Consensus Estimate of $24.8 billion.

After several quarters of sluggish performance, the Pharmacy Services segment recorded a robust 18.4% increase in revenues in the quarter to reach $14 billion. The growth was primarily driven by the addition of a long-term contract with Aetna, announced by the company earlier.

In addition, CVS witnessed a 19.5% year over year rise in retail network claims (to 157.7 million) and a 13% increase in mail choice claims (to 17.5 million) banking on the Aetna (AET) contract. Also, the increase in Medicare Part D prescription drug claims helped boost the retail network claims during the quarter.

Revenues from CVS’s other segment, Retail Pharmacy, increased 4.4% to $14.6 billion during the quarter with a 2.6% increase in total same-store sales. While pharmacy same-store sales rose 3.7%, front-end same-store sales increased by only 0.4%.

Pharmacy same-store sales were unfavorably impacted by roughly 260 basis points due to recent generic introductions, whereas the Maintenance Choice program had a positive impact of 170 basis points on a net basis.

The front store sales were negatively impacted by 45 basis points due to the shift of Easter holiday related sales into the second quarter and by 65 basis points due to the absence of sales associated with the reopening of the Longs stores in the year-ago quarter. Generic dispensing rate increased in the Pharmacy Services and Retail Pharmacy segments by 340 basis points to 73.8% and 310 basis points to 75.2%, respectively.

In April 2011, CVS acquired Universal American Corp.’s (UAM) Medicare prescription drug business. The company expects this acquisition to be accretive by roughly 8 cents to its adjusted earnings per share for the remainder of 2011.

During the first quarter, CVS opened 57 new retail drugstores, one new retail specialty pharmacy store and closed 13 retail drugstores. Also, it relocated 49 retail drugstores. At the end of the quarter, the company operated 7,314 locations including 7,226 retail drugstores, 66 specialty pharmacy stores, 18 specialty mail order pharmacies and 4 mail order pharmacies in 44 states, the District of Columbia and Puerto Rico.


CVS has reaffirmed its outlook for fiscal 2011. The company continues to expect adjusted earnings per share of between $2.72 and $2.82. The current Zacks Consensus Estimate of $2.77 is within this range.

Our Recommendation

We are encouraged by the improved performance of CVS’s Pharmacy Services segment which had been a drag on the company’s performance for the last few quarters. Moreover, the recent acquisition of the Medicare Part D business is a good move by the company to boost its PBM segment further. Moreover, we believe the healthcare reform will open up a big opportunity for the company. We are currently Neutral on the stock.

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