CVS Guides Lower

For Gilmartin's preview heading into the CVS Caremark conference call, please click here.

CVS Caremark (CVS - commentary - Cramer's Take) reported third-quarter earnings of 60 cents per share vs. the 50 cents per share reported one year ago and right in line with analyst estimates, for year-over-year growth of 20%. Revenue came in at $20.87 billion, a little shy of the analyst consensus of $21.07 billion, for year-over-year growth of 2%.

There were a lot of one-time items in the quarter that were footnoted in the press release, such as CVS assuming Linens-N-Things' lease obligations, which CVS guarantees and for which a recent auction of those leases attracted no interest. (What does that tell you about the state of retail?) The loss from the discounted operation was $82.8 million and cost CVS approximately 5 cents per share.

In terms of revenue distribution, the company is now roughly 50:50 retail drugstore and pharmacy benefit management (PBM) through the Caremark division, and surprisingly, it was the retail drugstore segment that seemed to hold up a little better in the quarter. For September quarter-end, retail pharmacy grew revenue by 5% year over year, and operating income rose 8% year over year as total pharma comps rose 3.7%, while front-end comps rose 3.3%. Meanwhile, Caremark's revenue fell 1%, and operating income here fell 8%, as the division lost some business in the third quarter.

To conclude, CVS guided slightly lower for the fourth quarter, which will eventually pull down analyst expectations for 2009, but the stock has discounted quite a bit of bad news already. Currently trading at $28 per share and with an analysts' consensus EPS estimate of $2.83 for 2009 (prior to this morning's results) vs. 2008's $2.46 EPS consensus calling for year-over-year expected growth of 13%, the shares discount quite a bit of negativity surrounding both the consumer and the PBM, even if 2009 earnings growth is just high single digits (e.g., 6% to 8%).

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At the time of publication, Gilmartin was long a low-cost-basis position in Walgreen from 1997, although positions may change at any time.

Brian Gilmartin, CFA, founded Trinity Asset Management (TAM) in 1995, where he is currently a portfolio manager. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gilmartin appreciates your feedback; click here to send him an email.