CVS Provides Impressive FY13 View

CVS Caremark Corporation ( CVS - Analyst Report ) , one of the largest domestic integrated pharmacy services providers, recently updated its fiscal 2013 outlook and highlighted its growth framework, while reiterating its earlier guidance for the current year.

2013 Outlook

For fiscal 2013, the company expects earnings per share (EPS) of $3.59−$3.73 with adjusted EPS of $3.84−$3.98, representing annualized growth of 13%−17%. The current Zacks Consensus Estimate of $3.78 falls below the adjusted EPS guided range. The company also expects free cash flow to remain at an encouraging level of $4.8 billion– $5.1 billion with cash from operations of $6.4 billion−$6.6 billion.

CVS noted that the fiscal 2013 guidance excludes the anticipated benefit from the company's recent debt tender and refinancing, which is expected to result in an annual EPS accretion of approximately 2 cents due to the reduction of the interest expense.

Further, CVS continued with its plan to deploy capital to boost shareholder confidence via dividends and share repurchases. The company expects to buy back shares worth $4 billion in fiscal 2013. Additionally, its board of directors has approved a 38% increase in quarterly dividend to 22.5 cents per share, payable February 4, 2013. This hike will bring the payout ratio to 25%, the low end of its targeted range of 25%–30%, which will likely be achieved in another three years.

Reiterates 2012 Outlook

Anticipating a benefit from the company’s accelerated share repurchase program (announced in September 2012) and its expectation of retaining at least 60% of the prescriptions gained from the Walgreen Inc. ( WAG - Analyst Report ) and Express Scripts Holding Co. ( ESRX - Analyst Report ) impasse, CVS expects adjusted EPS in fiscal 2012 to remain in the range of $3.38−$3.41. The current Zacks Consensus Estimate of $3.37 falls below the guidance range.

The company also reiterated its 2012 free cash flow and cash flow from operations guidance of $4.6–$4.9 billion and $6.2–$6.4 billion, respectively. The fiscal 2012 guidance includes the completion of the accelerated share repurchase agreement of $1.2 billion.

Obamacare: A Big Boost

While discussing the long-term growth trajectory, CVS expected the implementation of the Affordable Care Act (ACA) or Obamacare to play in favor of the company by providing the much needed impetus to its business. CVS is upbeat regarding the fact that under the ACA, beginning 2014, there will be an additional 30 million people to join in the list of insured people. The company believes that with this massive increase in the insured aging population, there will be a huge demand for specialty drugs, which could present a big opportunity for companies like CVS.

We are impressed with the company’s fiscal 2013 guidance, which remained above our expectation. We are also confident about CVS’ long-term potential, based on its retail execution, deployment potential and the strong generics cycle. Moreover, we believe that the healthcare reform will open up new opportunities for the company. Currently, CVS retains a Zacks #3 Rank (short-term Hold). Over the long term, we have a Neutral recommendation on the stock.