CVS Caremark (CVS) reported second quarter 2011 EPS of 60 cents, at par with the year-ago quarter earnings. However, after excluding the impact of certain one-time items, adjusted earnings per share came in at 65 cents, surpassing the Zacks Consensus Estimate by a penny but meeting the year-ago quarter’s adjusted earnings.
Net revenues increased 10.9% year over year to $26.6 billion, in line with the Zacks Consensus Estimate.
The Pharmacy Services segment recorded a robust 23.2% increase in revenues in the quarter to $14.6 billion. The significant growth was primarily driven by the long-term contract with Aetna (AET) as well as the new acquisition of the Medicare Part D business of Universal American Corp. (UAM).
These contracts, combined with an increase in covered lives in the company’s existing Medicare Part D business, also led to a 35.6% year-over-year rise in CVS’ pharmacy network claims to 174.0 million. The Aetna contract also drove the Mail Choice claims processed growth by 11.3% to 17.8 million.
Revenues from CVS’ Retail Pharmacy increased 3.6% to $14.8 billion during the quarter with same-store sales climbing 2.0%. While pharmacy same-store sales rose 2.6%, front-end same-store sales inched up 0.8%.
Pharmacy same-store sales witnessed a 170-basis point drop due to recent generic introductions, whereas the Maintenance Choice program had a positive impact of 160 basis points on a net basis. The front-store sales grew 45 basis points due to the shift of Easter holiday related sales into the second quarter.
In April 2011, CVS acquired Universal American’s Medicare Part D business. Subsequent to this acquisition, CVS provides Medicare Part D benefits to over 3 million beneficiaries.
During the first quarter, CVS opened 41 new retail drugstores, closed 2 retail specialty pharmacy stores, 5 specialty mail order pharmacies, 1 retail apothecary pharmacy store and 1 retail drugstore. Further, it relocated 18 retail drugstores.
At the end of the quarter, the company operated 7,346 locations including 7,226 retail drugstores, 31 specialty pharmacy stores, 32 apothecary pharmacy stores, 13 specialty mail order pharmacies and 4 mail order pharmacies in 44 states, including the District of Columbia and Puerto Rico.
Guidance
Based on a solid quarter and incremental start-up costs for the new business in 2012, CVS has narrowed down its EPS outlook for fiscal 2011. The company now expects adjusted EPS of $2.75–$2.81 (earlier guidance being $2.72–$2.82). The current Zacks Consensus Estimate of $2.78 is within this range.
Our Recommendation
We are encouraged by the improved performance of CVS’ Pharmacy Services segment for the second consecutive quarter, which had earlier been a drag on the company’s performance. Moreover, the acquisition of the Medicare Part D business is a good move companion the company’s part to boost its PBM segment further. We are also encouraged by CVS’ several recent contract wins over Medco (MHS) in the recent past which include Federal Employee Program (FEP) contract in May 2011, as well as the biggest US public pension fund Calpers.
In addition, we believe the healthcare reform will open up a big opportunity for the company. We are confident about CVS Caremark’s longer-term potential based on its retail execution, deployment potential and the strong 2012 generics cycle. We are currently Neutral on the stock.
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