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Analyst Blog

On Aug 28, we reiterated our long-term Neutral recommendation on CVS Caremark Corporation (CVS - Analyst Report) following healthy second-quarter results. This integrated pharmacy service provider carries a Zacks Rank #3 (Hold).

Why the Reiteration?

On Aug 6, EPS surged 19.5% to 97 cents, a penny higher than the Zacks Consensus Estimate. Per management, the improvement was led by higher profitability on the back of the generic wave in the pharmaceutical industry. Net revenue increased 1.7% year over year to $31.25 billion, ahead of the Zacks Consensus Estimate of $31.19 billion. Top line benefited from higher contributions from CVS’ segments – Pharmacy Services and Retail Pharmacy.

Although the introduction of generic drugs in the pharmaceutical industry hurt company-wide revenues, it continues to push profits higher for CVS. Specialty pharmacy represents another high-growth avenue as specialty revenues grew a robust 19% in the quarter. Market dynamics and demographic trends also work in CVS’ favor. Furthermore, after a weak first-quarter, the same-store sales and pharmacy store sales improvement in the second quarter came as an encouragement.

However, sluggish front-end same store sales were a downside in the second quarter. Meanwhile, the mega-merger between Express Scripts Holding Company (ESRX - Analyst Report) and Medco Health Solutions and resolution of Walgreens (WAG - Analyst Report)-Express Scripts impasse has intensified the competitive landscape and put CVS in a tight spot.

The somber macroeconomic condition adds to our apprehension. Following the second quarter, CVS narrowed its guidance for 2013 adjusted EPS to the range of $3.90–$3.96 compared with $3.89–$4.00 earlier. Despite several positive driving events, the tough competition and company-specific concerns keep us on the sidelines.

Stocks to Consider

While we have a neutral disposition on CVS, we are positive about GNC Holdings Inc. (GNC - Snapshot Report) doing well. The stock carries a Zacks Rank #2 (Buy).

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