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CVS Profit Rockets Higher

The second quarter beats estimates.


(CVS) - Get CVS Health Corporation Report

has posted record results -- beating Wall Street estimates -- as a newly combined company.

The drug delivery giant on Thursday said that profits rocketed 114%, hitting $724 million in the second quarter, on strength in the company's retail pharmacy and pharmacy benefit management businesses alike. Excluding merger-related integration costs, earnings per share of 48 cents topped the consensus estimate by 2 cents. Revenue almost doubled, reaching $20.7 billion in the period, to beat Wall Street targets as well.

Indeed, CVS-Caremark reported a slew of strong metrics for the quarter.

"Gross margin improved significantly, operating margins expanded meaningfully, and our diluted earnings per share grew 18%," CEO Tom Ryan boasted on Thursday. "At the same time, we've completed the initial merger integration activities, made sizeable progress on our cost synergy opportunities and significantly advanced our new go-to-market strategies.

"Our continued strong performance in our core retail and PBM segments, coupled with these achievements related to our new business model, should pave the way for significant enterprise-wide growth in the future."

Still, CVS-Caremark offered few extra details about its recent performance -- and no guidance yet for next year -- in its bare-bones quarterly update. However, the company could provide more color during a follow-up conference call when the market opens on Thursday.

Investors will be looking for good news to reignite the stock. CVS-Caremark shares hit a 52-week high of $39.44 a couple of months ago but have been slowly losing ground ever since. They sat at $35.54 ahead of Thursday's opening bell.

Analysts assumed that CVS-Caremark would post strong second-quarter results, possibly beating consensus estimates, with help from rising sales of high-margin generic drugs. After all,




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-- which run huge PBMs themselves -- have reported positive trends already.

From CVS-Caremark, however, analysts figured that investors would want even more.

"With the additional time that has passed since the closing of the Caremark merger -- and given that 2Q was the first full quarter to include Caremark -- we believe that investors will be eager to hear any updates on the direction of the combined company on Thursday as well as insight into progress with the 2008 PBM selling season," SunTrust Robinson Humphrey analyst David Magee wrote earlier this week. "On both fronts, however, we are not expecting a lot of new news from the company."

For his part, Magee feels comfortable with CVS-Caremark's outlook. He believes that CVS-Caremark is poised to hit its 2007 targets due to both favorable industry trends and company-specific strengths. A delay in potential Medicaid cuts, pushed out until next year now, gives him added comfort. Looming merger-related synergies make him feel confident as well.

"We remain bullish on the name," Magee wrote on Monday. "We believe there should be expansion in the (stock) multiple as the positives of the retail drug space ... continue and the opportunities associated with the Caremark merger play out."

Thus, Magee sees CVS-Caremark's stock as a bargain right now. He has a buy recommendation and a $43 price target on the shares. His firm has investment banking ties to the company.

William Blair analyst Mark Miller sounds a lot more cautious. While Miller figured that CVS-Caremark would meet -- and possibly even beat -- second-quarter targets, he expressed concern about the company's prospects down the road.

"Based on recent discussions with industry consultants, we understand that Caremark did not have as successful a selling season for 2008 relative to its top PBM competitors," stated Miller, who has a market-perform rating on CVS-Caremark's stock. Furthermore, "we believe that the risks inherent in a vertically integrated merger-of-equals combination may be larger than anticipated" by the market itself.

Deutsche Bank analyst William Dreher, who spent some time with CVS-Caremark leaders recently, is among those who feel optimistic about the company instead.

"It would appear to us that, while there are several months to go in the enrollment season, management is confident that the pace of enrollments is very good and progressing well," Dreher wrote on Monday. Ultimately, "CVS is the best-positioned company to absorb changes in the healthcare delivery business. ... We are buyers ahead of the

second-quarter call."

Dreher has a $46 price target on CVS-Caremark's stock, and his firm owns at least 1% of the company's shares itself.