AET Aetna Inc. (delisted)

Subsequent to the announcement of CVS Caremark’s (CVS) third quarter 2011 results on November 3, 2011, we witness a mixed trend in the analysts’ estimate revisions.

Street analysts have had nearly a week to ponder over the news. In the subsequent paragraphs, we will cover the recent earnings announcement, subsequent analysts’ estimate revisions as well as the Zacks Rank and long-term recommendation on the stock.

Third Quarter Highlights

CVS Caremark reported EPS of 65 cents in the third quarter, up 8.3% year over year. However, after excluding the impact of certain one-time items, adjusted EPS came in at 70 cents, surpassing the Zacks Consensus Estimate of 67 cents and 9.3% higher than the year-ago level.

Net revenue increased 12.5% year over year to $26.7 billion, almost in line with the Zacks Consensus Estimate, primarily due to strong performance of the Pharmacy Services segment. The segment recorded a robust 25.8% increase in revenues to $14.8 billion during the reported quarter. The significant growth was primarily on the back of the long-term contract with Aetna (AET) as well as the acquisition of the Medicare Part D business of Universal American Corp. (UAM).

Moreover, benefits from the company’s streamlining initiatives are expected to outweigh related costs in 2012. The company eyes further progress in the PBM segment based on its new business wins and strong client retention. By the end of the third quarter, the company completed more than 70% of 2012 renewals, which include AT&T, General Electric and a FEP Retail Contract worth $4 billion.

Based on a solid quarter, CVS Caremark updated its EPS outlook for fiscal 2011. The company now expects adjusted EPS of $2.77–$2.81 (earlier guidance being $2.75–$2.81). The guidance for cash flow from operations and free cash flow for fiscal 2011, however, remained unchanged at $5.5–$5.6 billion and $4.0–$4.2 billion, respectively.

For a full coverage on the earnings, read:CVS Posts a Strong Quarter

Agreement of Analysts

Estimate revision trends for the upcoming fourth quarter of fiscal 2011 and the first quarter of fiscal 2012 depicted the analysts’ mixed sentiments.

Over the past 30 days, 6 of the 16 analysts covering the stock have made downward revisions while 3 analysts raised their estimates for the fourth quarter. Besides, estimates for fiscal 2011 were raised by 13 analysts while none moved in the opposite direction. For the first quarter of fiscal 2012, only one analyst raised the estimate while 2 reduced the same.

After several quarters of declining revenues resulting from the disappointing results in the PBM segment, the analysts are encouraged by the improved performance of CVS Caremark’s Pharmacy Services segment for the third consecutive quarter.

Although concerns linger given the margin pressure, the analysts are confident about CVS Caremark’s longer-term potential, based on its retail execution, deployment potential and strong 2012 generics cycle. Moreover, the firms believe the healthcare reform will open up new avenues for the company. Alongside, CVS Caremark is looking to benefit from the ongoing Walgreen (WAG) -Express Script (ESRX) dispute for retail contract renewal. 

However, the analysts with a bearish outlook are concerned based on the proposed Medco (MHS) -Express Script merger, which is expected to throw more challenges for CVS Caremark in Pharmacy Services segment. The deal would combine two of the three largest US drug benefit managers and create an industry leader that holds over one-third of the market.  

Magnitude of Estimate Revisions

In the past 7 days, the magnitude of estimate revisions for the fourth quarter of 2011, fiscal 2011 and first quarter 2012 remained unchanged at 89 cents, $2.80 and 63 cents, respectively.

Our Recommendation

During the third quarter of 2011, improved performance was observed in the Pharmacy Services segment for the third consecutive quarter. CVS Caremark is also adopting several strategies to ensure consistent growth in its business. We are encouraged by its several recent contract wins, which would help maintain the growth momentum in coming years. Also, the company intends to take advantage of the ongoing Walgreen-Express Script dispute, which if successful will further bolster its Retail segment. However, margins continue to remain under pressure. We reiterate a Neutral recommendation on the stock. 

CVS Caremark holds a Zacks #2 Rank, implying a short-term Buy rating on the stock. Besides, the company retains a long-term Neutral recommendation on the stock.

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard" articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/

 
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