Medco Feels No Pain

Profit jumps at the giant pharmacy.
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With its strong second-quarter results -- and raised guidance for the entire year --

Medco

(MHS)

has served up another healthy dose of good news.

The giant pharmacy benefit manager blew past Wall Street expectations on Friday, as sales of high-margin generic drugs hit record levels and the company's lucrative mail-order business continued to expand. Net income surged 26% to $215 million during the latest quarter, with operating profits of 86 cents a share beating the consensus estimate by 8 cents.

Looking ahead, Medco expects that strong momentum to continue. Thus, the company has raised its 2007 guidance by a full dime to $3.50 to $3.55 a share. Analysts have been projecting full-year profits of just $3.44 instead.

"With the acceleration of generic opportunities, increased mail penetration and strong cash flow, Medco's second-quarter results reflect continued fundamental strength across our business," the company boasted on Friday. "Based on Medco's continued strong financial performance -- including the introduction of generic products not anticipated in our previous guidance -- we are pleased to once again raise earnings estimates for the year."

Medco's second-quarter generic dispensing rate, which rose 5% from a year ago to hit 58.9%, set a new company record in the meantime. The generic dispensing rate for Medco's Medicare Part D business reached an even higher 62.9% during that same timeframe.

Medco's mail-order business continued to expand as well. Specifically, mail-order volumes grew by 6.3% -- more than three times as much as lower-margin retail volumes -- during the latest period. All told, Medco delivered some 37.7% of its prescriptions through the mail last quarter. Even Medicare customers have been rapidly adopting the mail-order option.

Going forward, new contract wins -- particularly the huge Federal Employee Program account -- should boost Medco's mail-order business even more. Counting the FEP contract, which Medco stole away from rival

CVS/Caremark

(CVS) - Get Report

, the company secured nearly $4 billion worth of new business since the first quarter of this year.

UBS analyst Ricky Goldwasser sure likes what he sees. Goldwasser has a buy recommendation and a $91 price target on Medco's shares. His firm makes a market in the company's securities.

"MHS provided an update on the selling season, providing the Street more visibility into 2H07 and 2008

and removing concerns weighing on MHS shares prior to reporting this morning," Goldwasser wrote on Friday. "We expect MHS shares to trade up this morning on the strong results and the greater visibility."

Medco's stock rose $1.24 to $79.43 after trading as high as $81.44.

Meanwhile, Credit Suisse analyst Glen Santangelo has grown increasingly bullish on Medco as well. Although he stopped short of upgrading Medco's stock ahead of the company's second-quarter report, sticking instead with his neutral rating for now, he did go long on Medco in his model portfolio.

His firm seeks to do business with the companies it covers.

"We believe we could see 5% to 10% upside in MHS shares," Santangelo wrote on Thursday. And "we see limited downside to the price."