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Analyst Blog

On Feb 26, 2013, we reiterated our long-term Neutral recommendation on CVS Caremark (CVS - Analyst Report) following the strong fourth-quarter 2012 results.

Why Neutral?

As reported on Feb 6, CVS’ fourth-quarter 2012 earnings and revenues beat the Zacks Consensus Estimate quite comprehensively. Its adjusted earnings rose 28.1% year over year to $1.14, beating the Zacks Consensus Estimate by 3.6%.  Net revenue shot up 10.9% to $31.4 billion, surpassing the Zacks Consensus Estimate. We note that the company surpassed its financial goals for 2012.

The company anticipates benefits from the debt tender offer and refinancing initiatives. CVS has thereby raised its adjusted earnings outlook for 2013 and currently expects adjusted earnings in the band of $3.86-$4.00 for the ongoing year while the current Zacks Consensus Estimate is pegged at $3.92. Analysts have revised estimates upward following the release of the fourth-quarter results. Given the bullish estimates, the stock carries a Zacks Rank #2 (Buy).

CVS gained from the earlier Walgreens (WAG - Analyst Report)-Express Scripts (ESRX - Analyst Report) impasse in 2012. While CVS met its goal of retaining 60% of the scripts gained from Walgreens during the impasse, we are apprehensive about the company’s optimistic target of retaining the same throughout 2013. We believe that CVS might lose momentum on account of the resolution.

While the tussle for market share with the retail giant raises concern, CVS also continues to lag Express Scripts in Pharmacy Business Management (PBM). The situation is not likely to improve in 2013. Adding to our concerns, macroeconomic conditions remain unyielding.

As health care costs continue to climb despite the current economic doldrums and severe budget pressures, the need for innovative solutions like PBM continues to grow. However, drug retail and PBM is a highly competitive business in the U.S. Although CVS is set on a growth trajectory, the tough competitive landscape warrants caution. Thus, we prefer to remain on the sidelines.

Other Stocks to Consider

Apart from CVS, Cardinal Health (CAH - Analyst Report) which carries a Zacks Rank #2 (Buy) warrants a look.

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