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Analyst Blog

On Nov 27, we reiterated our long-term Neutral recommendation on CVS Caremark Corporation (CVS - Analyst Report) following healthy third-quarter 2013 results. This integrated pharmacy service provider carries a Zacks Rank #3 (Hold).

Why the Reiteration?

On Nov 5, CVS’ reported adjusted EPS of $1.05, which surged 23.9% year over year and exceeded the Zacks Consensus Estimate by 3 cents. This marks the seventh consecutive quarter of positive earnings surprise for CVS. Per management, the improvement was led by higher profitability on the back of increased generic drugs dispensed and the growth of Maintenance Choice program in the Pharmacy Services and Retail Pharmacy segments.

Net revenue improved 5.8% year over year to $31.97 billion in the third quarter, surpassing the Zacks Consensus Estimate of $31.49 billion. The top line benefited from higher contributions from CVS’ segments – Pharmacy Services and Retail Pharmacy.

The generic wave in the pharmaceutical industry continues to work in CVS’ favor, as seen in the consistent margin expansion of the company. Specialty pharmacy represents another high-growth avenue as specialty revenues grew a robust 22% in the quarter. CVS raised its guidance for 2013 adjusted EPS to reflect the strong year-over-year growth and the company’s optimism about the future.

Market dynamics and demographic trends are also working in CVS’ favor. Furthermore, improvements in same-store and pharmacy store sales during the quarter are an encouraging factor.

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 the Walgreen Co. (WAG - Analyst Report)-Express Scripts impasse has intensified the competitive landscape putting CVS in a tight spot. The somber macroeconomic condition adds to our apprehension. Despite several positive driving events, the tough competition and company-specific concerns keep us on the sidelines.

Other Stocks to Consider

While we have a neutral disposition on CVS, we are optimistic about Rite Aid Corporation (RAD - Analyst Report) doing well. The stock sports a Zacks Rank #1 (Strong Buy).

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