Recently, we reiterated our Neutral recommendation on CVS Caremark Corporation (CVS) with a target price of $35.00.
CVS Caremark reported an adjusted EPS of 80 cents in the fourth quarter of fiscal 2010, beating both the Zacks Consensus Estimate and the year-ago period by a penny. For the full year, the adjusted EPS of $2.69 was in line with the Zacks Consensus Estimate. However, the EPS declined compared to the previous year’s $2.74.
Revenues decreased 4.1% year over year to $24.8 billion in the quarter as its Pharmacy Services segment still disappoints. However, revenues marginally missed the Zacks Consensus Estimate of $24.9 billion.
For the full year, revenues declined 2.3% to reach $96.4 billion, missing the Zacks Consensus Estimate of $96.6 billion. A 3% decline in share count had a favorable impact on the bottom line.
Revenues from the Pharmacy Services segment declined 9.7% during the quarter to $12.2 billion, while Retail Pharmacy revenue increasing by 3.1% to $14.9 billion.
CVS expects to maintain its strong performance in the Retail segment going ahead. The company expects this business to record growth in both sales (4%−6%) and operating profit (6%−8%) in 2011 with a 2.5%−4.5% rise in same-store sales.
Although CVS has been struggling with its PBM business, the company is confident of achieving operating profit growth in 2012. This is based on the huge potential of generic drugs that are likely to go off-patent in 2012, benefits from the company’s streamlining initiatives, and rise in accretion from the Aetna (AET) contract.
The company also expects continued growth in Specialty Pharmacy and Medicare Part D Businesses, especially after its decision (in December 2010) to acquire Universal American’s (UAM) Medicare Part D business. On completion of the deal (expected in the second quarter of 2011), the number of covered lives is expected to more than double in one of the fastest growing segments in the PBM space.
Although CVS expects to record a 23%−26% growth in PBM revenues in 2011, operating margin of the segment could decline by 5%−9%. The biggest factors affecting margins are the full year wrap effect of the FEP contract extension (which took effect in September 2010) and margin compression from other renewals.
Moreover, lower introduction of generics in 2011 (lowest year in recent history) and expenses associated with the PBM streamlining initiative will also affect margins.
As a result, the near-term outlook continues to remain challenging for the company based on which we have the Zacks #4 Rank (Sell) in the short-term. However, we remain confident about the long-term potential of CVS and maintain our Neutral stand.
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