Pharmacy operator CVS Caremark (CVS) shares stumbled down more than 20% on Thursday morning after they reported earnings.  The earnings themselves were just about what the street had expected with profit from continuing operations coming in at $.65 per share, besting estimates by one penny.  However, the company revealed that their Caremark pharmacy benefits management unit lost $2 billion in business in the period.  The lost contracts include such as large deals with New Jersey state Blue Cross plan and Ohio’s managed Medicare.  Contracts such as these are a major loss for shareholders as they represent a steady stream of reliable income that adds to the stability of the pharmacy business.  The President of the Caremark unit will step down and his responsibilities will temporarily be assumed by CEO Tom Ryan.

The quarter was otherwise pretty decent for CVS with revenue rising 18% to $24.64 billion, which was on pace with analysts’ expectations.  Revenue at drug stores increased 17.9% which was aided by a 10% increase in flu related prescriptions, which the company expects to remain strong through the fourth quarter.  Furthermore, same store sales wereCVS impressive, growing at a 5.7% rate.  Net income was up 39% to $1.02 billion or $.72 per share, but there was also a reported eleven cent tax benefit.  Management was prompted to lift the lower end of its full year earnings guidance range by two cents per share to $2.61 to $2.64.

The loss of these valuable contracts really put a damper on otherwise in-line results.  The CEO said that the company will not reach its stated goal of 13% to 15% growth in earnings per share next year; growth that analysts had baked into consensus estimates at 14.5%.  This disappoint is due to the Caremark unit, which could see earnings drop as much as 10% to 12%.

We have an Undervalued rating on CVS coming into this report and following the sell-off we are likely to maintain this stance following the weaker results from Caremark.  The company announced that it will buy back $2 billion worth of stock through 2011, suggesting that they are trying to support the stock.  With the stock selling below its historically normal price-to-cash earnings and price-to-sales ranges, this stock still looks attractive to the long term investor.  Although, according to our methodology, we continue to view its closest competitor Walgreen’s (WAG) as the most attractive stock in the pharmacy space.

CVS Caremark Tumbles on Lost Business