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One Sector With Revenue Growth

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Yesterday, CVS Caremark (CVS - Free Report) credited strength in pharmacy services and pharmacy sales for increasing second-quarter earnings. The company reported 22.1% revenue growth in its pharmacy services segment and 7.5% growth in pharmacy same-store sales.

CVS Caremark's earnings were notable not only for surpassing expectations (65 cents per share versus the Zacks Consensus Estimate of 64 cents), but because they were driven by revenue growth. Many companies have relied on cost-cutting, not revenue growth, to push earnings above expectations.

The reason I mention CVS is because Medical is the one sector where I'm seeing several companies growing revenues on a year-over-year basis. The reason is that drugs and medical supplies are less economically sensitive than most other products.

Medical stands out for the large number of earnings estimate revisions. Over 900 full-year profit forecasts have been raised over the last 4 weeks. More than half of these revisions are for companies in just 3 groups: Medical-Drugs, Medical Products and Medical-Biomed/Genetics.

Several Zacks #1 Rank and Zacks #2 Rank Medical Stocks

A combination of revenue growth, positive earnings surprises and, in some cases, raised guidance has prompted brokerage analysts to increase their full-year profit projections on several medical stocks. Here is a sample of the good reports:

Life Technology (LIFE) generated non-GAAP profits of 79 cents per share. (The Zacks Consensus Estimate was 66 cents per share.) The spread of Influenza A (H1N1) and good demand for other products helped revenues grow to $839 million. The company raised its full-year non-GAAP guidance to between $2.70 and $2.80 per share. The majority of the 13 analysts followed suit, pushing the average forecast 14 cents higher to $2.76 per share. LIFE is a Zacks #1 Rank ("strong buy") stock.

NuVasive, Inc. (NUVA - Free Report) reported profits of 7 cents per share, reversing a 1-cent loss from a year prior and besting expectations. Revenues surged 54.1% to $88.5 million as the company's XLIF spine procedure gained adoption. NUVA raised its full-year EPS guidance to between 25 and 27 cents per share, from a previous forecast for a loss of between 5 and 7 cents. All 12 covering analysts raised their profit projections in response. The Zacks Consensus Estimate now calls for earnings of 26 cents per share. NUVA is a Zacks #2 Rank stock.

Sepracor (SEPR) earned 72 cents per share on a non-GAAP basis, a sharp increase from year-ago profits of 6 cents. The result was also 34 cents above expectations. Higher LUNESTA sales, plus increases for other products, helped revenues rise 11%, to $326.2 million. SEPR now expects full-year earnings to total $2.55 to $2.90 per share, versus its prior forecast of $2.10 to $2.70 per share. The Zacks Consensus Estimate now stands at $2.85 per share, reflecting positive revisions by the majority of the covering brokerage analysts.

Some Zacks #3 Rank Stocks Worth Looking At, Too

Due to the high number of brokerage analysts that follow large-cap companies, it is often difficult for these companies to hold onto a Zacks #1 Rank or a Zacks #2 Rank. The reason is that analyst agreement is one of the 4 factors that determine the Zacks Rank and some analysts simply lag in updating their forecasts.

An example of is Gilead Sciences (GILD - Free Report) , which is covered by 24 analysts. The company earned 65 cents on an adjusted basis, topping expectations by 3 cents. (A year prior, the company earned 47 cents per share.) Growth in antiviral products led to a 29% increase in total revenues ($1.57 billion).

The majority of the covering analysts raised their full-year forecasts in response, pushing the consensus earnings estimate 8 cents higher to $2.57 per share. Though the positive revision is bullish, the lack of changes by all of the covering analysts kept GILD from maintaining its Zacks #2 Rank. However, investors seeking a large-cap company should take the positive revisions into account when evaluating GILD.

Healthcare Reform

Though earnings estimates are being revised higher, there is political risk due to ongoing discussions about healthcare. The current proposals will likely have a net positive effect for the drug companies, however, especially if they result in greater access to prescription medicine. Furthermore, some of the political risk has been priced in, as is evident by the relative valuations of health care stocks to those in other sectors.

Charles holds a position in Health Care SPDR (XLV) in Zacks ETF Trader.

Sector Rank as of Aug 5
Sector This Week's
Zacks Rank
Last Week's
Zacks Rank
FY09
Revisions Ratio
FY09 Estimates
Revised Up
FY09 Estimates
Revised Down
Consumer Staples 2.67 2.64 3.01 355 118
Retail-Wholesale 2.75 2.71 1.89 569 301
Conglomerates 2.78 2.81 1.06 55 52
Computer and Technology 2.87 2.86 1.74 1420 815
Consumer Discretionary 2.90 2.92 1.25 357 285
Medical 2.94 2.92 2.27 1013 446
Business Services 2.98 3.06 1.63 173 106
Oils-Energy 2.99 2.96 1.00 603 605
Utilities 3.00 3.01 0.72 119 165
Auto-Tires-Trucks 3.04 3.09 1.08 77 71
Industrial Products 3.07 3.05 1.03 269 262
Basic Materials 3.11 3.11 0.94 292 311
Finance 3.12 3.15 0.95 1201 1263
Construction 3.17 3.21 0.83 111 133
Aerospace 3.28 3.20 0.61 77 127
Transportation 3.45 3.37 0.45 164 367

Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.


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