Soft Guidance Hammers Medco

Updated from 9 a.m.

Medco (MHS Quote) plunged 14% early Tuesday after the big mail-order pharmacy warned that 2006 earnings might not please Wall Street.

The company posted a 33% earnings gain for its third quarter, as revenue hit $9.3 billion. Third-quarter profits of 62 cents a share came in 2 cents ahead of the consensus estimate.

But the company guided to 2006 earnings of between $2.52 and $2.64. Analysts were expecting Medco to report operating profits of $2.38 in 2005 and $2.79 in 2006. Medco dropped $7.50 to $49.

"Our performance in improving sales, achieving record levels of retention and expansion into Medicare and specialty pharmacy makes us confident that we will achieve our objective of recording double-digit earnings growth in 2005," CEO David Snow said, "and to achieve continued strong growth in 2006."

Early Calls

Several analysts recommended buying Medco ahead of the company's latest report. Still, one had backed away. Andrew Speller of A.G. Edwards cut the stock from buy to hold on Friday over valuation concerns.

Speller's downgrade came right after Medco jumped 4% in a single day -- leaving the stock up 33% for the year -- following a strong report from competitor Express Scripts (ESRX Quote). But others continued to feel bullish on PBMs in general, even after the recent rally.