We have recently upgraded our recommendation on CVS Caremark Corporation (CVS) to Neutral. During the fourth quarter of 2009, the company reported earnings per share (EPS) of 79 cents, beating the Zacks Consensus Estimate by a penny. Revenues increased 7% year-over-year to $25.8 billion, driven by the robust growth of both segments – Pharmacy Services and Retail Pharmacy.
 
Recent revisions in 2010 earnings estimates for CVS have followed a strong upward (positive) bias. Over the last 30 days, 10 of the 19 analysts following the stock have raised their estimates for fiscal 2010, with only 4 analysts moving in the opposite direction. An upward bias can be witnessed in the last 7 days as well, with 2 of the 19 analysts raising their estimates. There were no downward revisions during this period.
 
Although the loss of $4.8 billion worth of PBM contracts for 2010 was a big blow, CVS is taking several initiatives to avoid such incidents. The company has been trying to detect service issues or other areas of dissatisfaction among its clients. For 2011 selling season, about $7.5 billion worth of contracts are up for renewal. The encouraging outlook for 2011 is evident from the fact that 5 of the 20 analysts covering the stock have raised their estimates while only 3 have moved in the opposite direction.
We remain optimistic about domestic demographic trends, which are expected to drive utilization rates for years to come as the population ages. Thus, Retail Pharmacy operators like CVS Caremark should be able to grow and capture market share.
 
Additionally, the company’s mail order service is gaining popularity, which will aid in providing additional top-line opportunities. CVS Caremark has initiated many steps to make prescription drugs more affordable to consumers.
 
We also expect CVS to continue to benefit from the integration of Longs Drugs, the Osco/Sav-On acquisition and the Eckerd turnaround. Furthermore, the development of PharmaCare and MinuteClinic business should enable the company to maintain a leading position within the industry.

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