CVS Keeps Rising on Walgreen’s Fall

05/02/2012 4:52 pm EST


Jim Jubak

Founder and Editor,

The drugstore chain continues to get a boost from the dispute between its main competitor, Walgreen, and benefits administrator Express Scripts, writes MoneyShow’s Jim Jubak, also of Jubak’s Picks.

CVS Caremark (CVS) reported earnings for the company’s first quarter of 65 cents a share, 2 cents a share above the Wall Street consensus. The company also reported a 19.9% year-to-year increase in revenue, to $30.8 billion. That analyst consensus called for $30.29 billion in revenue.

More importantly in the current profit-taking-prone market, the company raised guidance for the second quarter, to earnings per share of 78 cents to 80 cents, versus the current 74 cents a share analyst estimate.

For all of 2012, the company forecast earnings of $3.23 to $3.33 a share. That’s a big increase from prior guidance of $3.18 to $3.28 a share. The Wall Street consensus was $3.29 a share for 2012.

On the higher guidance, I’m raising my target price for these shares to $53 a share, from my previous target of $48 by October. (CVS Caremark is a member of my Jubak’s Picks 12-18 month portfolio.) The shares are up 2.7% to $45.91 as of 3 p.m. New York time today.

So where did the extra earnings (and the improved guidance) come from?

CVS Caremark’s pharmacy benefits management unit continues to pick up business from Walgreen (WAG) as a result of that company’s contract dispute with pharmacy-benefits manager Express Scripts Holding (ESRX).

In the second quarter, CVS Caremark expects to pick up another 3 cents to 4 cents a share from that dispute. In the first quarter, revenue at that unit grew by 32%, to $18.3 billion.

At the company’s retail drugstore unit, revenue climbed by 9.9% to $16 billion. Same-store sales were up 8.4% from the first quarter of 2011. Same-store sales would have climbed even more except for higher sales of recently introduced generics with lower prices.

The company’s newest business, its in-store MinuteClinic health-care centers, grew revenue by 22% in the quarter.

In the quarter, CVS Caremark generated $2.4 billion in free cash flow. The shares pay a dividend of 1.4%.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Polypore International as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio here.

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