CVS Caremark (CVS) reported fourth quarter 2011
EPS of 84 cents, 11.9% up year over year. However, after excluding
the impact of certain one-time items, adjusted EPS came in at 89
cents, in line with the Zacks Consensus Estimate and 12.6% higher
than the year-ago quarter.
Excluding a tax benefit of 3 cents per share in fourth quarter
of 2010, adjusted EPS went up 16.2% year over year. For the full
year, adjusted EPS rose 4.5% (5.9% excluding 2010 tax benefit) to
$2.80, matching the Zacks Consensus Estimate. Improved operating
profit in both Pharmacy Services and Retail Pharmacy segments
contributed to the overall growth in earnings.
Net revenue during the quarter increased 15.2% year over year to
$28.31 billion, beating the Zacks Consensus Estimate of $28.01
billion. Fiscal 2011 revenues for CVS came in at $107.1 billion, up
11.8% and almost in line with the Zacks Consensus Estimate of
$107.3 billion.
The Pharmacy Services segment posted a robust 32.4% increase in
revenues to $15.9 billion during the reported quarter. The
significant growth was primarily on the back of the long-term
contract with Aetna (AET) as well as new activity
resulting from the acquisition of the Medicare Part D business of
Universal American Corp. (UAM).
These contracts, combined with an increase in covered lives in
the company’s existing Medicare Part D business, also led to a
46.0% year-over-year rise in CVS’ pharmacy network claims to 193.0
million. The Aetna contract also drove the Mail Choice claims
processed growth by 8.1% to 17.8 million.
Revenues from CVS’ Retail Pharmacy increased 4.0% to $15.5
billion with same-store sales climbing 2.5%. While Pharmacy
same-store sales rose 3.6%, front-end same-store sales spiked
0.1%.
The calendar day shifts in the reported quarter, which had one
additional Saturday and one fewer Friday compared with the same
period last year, negatively impacted pharmacy same store sales by
50 basis points (bps). Additionally, when 90-day scripts are
counted as one script, pharmacy same-store prescription volumes
rose 2.1%.
Converting 90-day scripts into 3 scripts, same-store
prescription volumes increased 4.4% year over year. Pharmacy
same-store sales witnessed a 235 basis points drop due to recent
generic introductions, whereas the Maintenance Choice program had a
positive impact of 160 bps on a net basis.
The generic dispensing rate in the quarter increased 220 bps to
75.0% in Pharmacy Services segment and 210 bps to 75.9% in Retail
Pharmacy segment.
Cost of revenues during the quarter increased 18.9% year over
year to $22.8 million. This contributed to 258 bps contraction in
gross margin to 19.6%. Operating margin declined 26 bps to
6.9%.
CVS exited the fiscal 2011 with cash and cash equivalents of
$1.41 billion, compared to $1.42 billion at the end of fiscal 2010.
The company generated $4.6 billion in free cash for the year
(exceeding its guidance range of $4.0–$4.2 billion).
The company’s continuous share buyback program benefited the
bottom line. Year to date, the company returned over $3.5 billion
to its shareholders in the form dividends and share
repurchases.
During the fourth quarter, CVS opened 24 new retail drugstores,
closed 1 retail drugstore. Additionally, the company relocated 5
retail drugstores. At the end of the fourth quarter, CVS operated
7,404 locations, including 7,327 retail drugstores, 30 onsite
pharmacies, 31 retail specialty pharmacy stores, 12 specialty mail
order pharmacies and four mail order pharmacies in 44 states, the
District of Columbia and Puerto Rico.
Guidance
Based on a solid quarter, CVS raised its EPS outlook for fiscal
2012. The company now expects adjusted EPS of $3.18 to $3.28
(earlier guidance being $3.15–$3.25). The current Zacks Consensus
Estimate of $3.25 is within this range.
CVS is presently working to benefit from the ongoing
Walgreens (WAG)-Express Script
(ESRX) dispute on retail contract renewals. CVS anticipates a
benefit of roughly 3 cents per share in the first quarter of 2012
from this disagreement.
The company now expects the Retail Pharmacy segment's operating
profit to increase by 8.5%–10.5% (7%–9%) while that of the Pharmacy
Services segment remained unchanged at 11%–15%. The guidance for
cash flow from operations and free cash flow for fiscal 2012, are
$6.2–$6.4 billion ($5.5–$5.6 billion) and $4.6–$4.9 billion
($4.0–$4.2 billion) respectively.
These 2012 guidance estimates assume the completion of $3
billion in share repurchases, the amount remaining in the share
repurchase program authorized in 2011 by CVS Caremark's board of
directors.
Our Recommendation
We are encouraged by the improved performance of CVS’ Pharmacy
Services segment for the third consecutive quarter, which had
earlier been a drag on the company’s performance. We are also
encouraged by CVS’ several recent contract wins over
Medco (MHS) in the recent past.
We are also pleased with the company’s guidance for 2012.
Although concerns linger given the margin pressure felt by the
company, we are confident about CVS’ longer-term potential, based
on its retail execution, deployment potential and the strong 2012
generics cycle.
Moreover, we believe the healthcare reform will open up new
opportunities for the company. However, the proposed merger between
Express Script and Medco will intensify competition in the Pharmacy
Services segment.
CVS currently retains a short-term Zacks #2 Rank (Buy). Over the
long term, we have a Neutral recommendation in the stock.
AETNA INC-NEW (AET): Free Stock Analysis Report
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