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CVS Caremark (NYSE:CVS), the second largest drug retailer after Walgreens with 7,300+ stores, will announce its earnings Thursday morning. The previous quarter earnings showed impressive results riding on the back of its revitalized Pharmacy Benefits Management (NYSEMKT:PBM) business. CVS Caremark is an integrated pharmacy services provider and drugstore chain that competes with Walgreen (NYSE:WAG), Wal-Mart (NYSE:WMT) and Rite-Aid (NYSE:RAD) in its Prescription Drugs, OTC Drugs and general merchandise segment. It also competes with Medco Health Solutions (NYSE:MHS) and Express Scripts (NASDAQ:ESRX) in its Pharmacy Benefits Management segment.

Pharmacy Benefits Management business shining

The previous quarter earnings showed impressive results riding on the back of its revitalized Pharmacy Benefits Management (PBM) business after it won high profile contracts from CalPERS, Aetna and FEP. These have helped arrest the decline in the number of pharmacy claims and provided a much needed upside to the PBM business.

This year, pharmacy revenues have jumped 20-25% leading to more than a 10% growth in total revenues. In the first half of 2011, network claims processed by CVS grew by 30% and mail choice claims increased by 10%. With the new FEP contract in place from 2012, PBM revenues should see further growth next year which has provided further upside to our forecasts. We expect the CVS Caremark’s PBM segment to continue to lead the company’s performance this quarter.

Also, as 2012 begins the generic wave, which will carry through the next several years with about $100 million of branded products coming off patent by 2016, the PBM segment is also expected to achieve healthy operating profit growth.

(Chart created by using Trefis' app)

Yet, front-end sales growth lower than peers

However, CVS Caremark’s front-end sales growth has slowed down compared to Walgreen and Rite Aid, both of which have been delivering better comparable same store sales growth through expanded product-list ranging from groceries to beer and renovated stores. We will look for improvements in CVS’s front-end sales performance this quarter.

We have a $44 price estimate for CVS Caremark, which is about 20% ahead of the current market price.

Disclosure: No positions

Source: CVS Caremark Earnings Preview