CVS Caremark (CVS) reported an EPS of 60 cents for the third quarter of fiscal 2010, compared to 71 cents from the year-ago period. However, after considering certain adjustments and excluding a tax benefit in the third quarter of 2009, the EPS was 65 cents, beating the Zacks Consensus Estimate by a penny and unchanged from the year-ago period.
Revenues decreased 3.1% year over year to $23.9 billion primarily due to a major disappointment in its Pharmacy Services segment. However, revenues met the Zacks Consensus Estimate. The Pharmacy Services segment recorded an 8.5% decline in revenues to $11.9 billion, driven by the termination of some large contracts (effective since January 2010) announced by the company earlier. In addition, the coverage of Medicare Part D program declined due to the 2010 competitive bidding process, partially offset by new client wins. However, after adjusting for the recent generic introductions, the decline in revenues would have been lower, at 1.6%.
Revenues of CVS’s other segment, Retail Pharmacy, increased 4.1% to $14.2 billion during the quarter with a 2.5% increase in total same-store sales. While pharmacy same-store sales rose 3.0%, front-end same-store sales increased 1.4%.
Pharmacy Services same-store sales were negatively impacted by 280 basis points due to recent generic introductions, whereas the Maintenance Choice program had a positive impact of 240 basis points. Generic dispensing rate increased in the Pharmacy Services and Retail Pharmacy segments by 370 basis points to 72.0% and 340 basis points to 73.5%, respectively.
Guidance
CVS has narrowed its EPS outlook for 2010. The company now expects adjusted EPS of $2.68−$2.70 compared to the previous guidance of $2.68−$2.73. In addition, CVS reiterated its free cash flow guidance of $2.5 billion.
Recommendation
Although the Pharmacy Services segment is suffering due to the loss of contracts in 2009, we believe the contract with Aetna (AET), signed during the previous quarter, should boost the company’s top line, going ahead. Furthermore, CVS is looking at adopting several strategies such as the development of its PharmaCare and MinuteClinic units, which should enable the company to enjoy a leading position within the industry.
We maintain our “Neutral” recommendation on the stock for the long term (3−6 months). For the short term (1−3 months), the company corresponds to a Zacks #3 Rank (Hold).
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