Drugstore Chain Ups Earnings Target After Competition Contract Issues

| About: CVS Health (CVS)
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by Renee O'Farrell

CVS Caremark (NYSE:CVS) reported its first-quarter earnings on May 2nd of 65 cents a share, edging out analyst estimates of 63 cents a share by 3.2%. After its solid performance last quarter, the company announced that it was raising its full-year target to $3.23 to $3.33 a share, up from $3.18 to $3.28. According to the Wall Street Journal, the company was also encouraged to raise its target thanks "to the expected benefits of the contract impasse between pharmacy-benefit manager Express Scripts Holding (NASDAQ:ESRX) and rival Walgreen (WAG)."

CVS is working hard to keep the growth going that came after the contract between Walgreen and Express Scripts ended. As reported by the Associated Press: "CEO Larry Merlo estimates that his company filled about 5.7 million to 6.5 million additional prescriptions in the first quarter due to Walgreen-Express Scripts dispute, which added about 3 cents per share to his company's earnings. All told, CVS Caremark filled more than 179 million prescriptions at its retail pharmacies in the first three months of 2012." To keep the increased number of customers, CVS is focusing on keeping the transition from Walgreen to CVS as smooth as possible. If CVS can retain those customers, the company's target could go even higher.

For now the company looks pretty good. It recently traded at $45 a share. Last year, the company earned $2.80 a share. It is expected to earn $3.27 a share this year, rising to $3.69 a share next year according to analyst consensus. At these rates, CVS has a forward P/E ratio of 12.20 times its future earnings. CVS is also quite popular with hedge funds. Of the 350-plus fund managers we track, over 30 either opened a position in the company during the fourth quarter 2011, including Jim Simons' Renaissance Technologies and Lee Ainslie's Maverick Capital, or increased their holdings in the company, like Warren Buffett did (check out his top picks for Berkshire Hathaway).

Compare this to Walgreen, the largest drugstore chain in the U.S. (CVS is second). Analysts estimate the company could lose as much as $4 billion in sales in 2012 alone from the end of its contract with Express Scripts (read about it here). Walgreen may be able to bounce back from that; the company is opening a bevy of new stores and has a strong focus on cost reduction that will help to offset its inevitable losses. In comparison, 20 hedge fund managers either sold out of their positions or reduced their stakes in Walgreen during the fourth quarter -- and there were 16 with call positions in the company at the end of December.

Walgreen recently traded at $34 a share. Analysts expect the company will earn $2.62 a share this year, down from $2.64 a share last year. Going forward, they estimate Walgreen will earn $2.88 a share next year, which puts its forward P/E ratio at 11.81 times its future earnings, which is roughly on par with CVS. However, Walgreen doesn't have nearly the expected growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.