This Industry Is Not a Very Good Investment

tarun is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The drugstore operator and pharmacy benefits manager, CVS Caremark Corporation (NYSE: CVS) posted its third-quarter earnings on Tuesday, climbing up by 16%. The revenues in both the businesses of the company have increased, benefited by the customers it has earned from its rivals.

Net revenue was reported at $30.2 billion, rising 13.3% in the current quarter compared to the same quarter last year. The Pharmacy Services segment posted a handsome 22.2% increase in revenues to $18.1 billion on a comparative basis. Revenues from CVS’ Retail Pharmacy have increased by 5.5% to $15.5 billion and same-store sales have improved by 4.3%.

Walgreen (NYSE: WAG) lost its contract with Express Scripts Holding Company (NASDAQ: ESRX) in January this year, hugely benefiting CVS’s business. CVS was further rewarded with a strong prescription growth that was supported by the company’s pharmacy same-store sales, which grew 5.3% in the quarter. Client additions during the year’s selling season, drug cost inflation, and growth in the Medicare Part D business further helped the company.

Others in the Industry

Express Scripts, the nation's largest pharmacy, fell the most in more than 10 years after Chairman and Chief Executive George Paz said that the forecasts for fiscal year 2013 were "overly aggressive.” The company believes that the market place is very competitive and its client base is sophisticated, wanting a larger share of profits. The large clients of Express Scripts are either not hiring many employees or they are using contractors, thereby saving medical benefit expenses. Mid-sized firms were waiting for the elections to finish to make their health care decisions. The company seems a little pessimistic with the future because of the current weak business and unemployment outlook. The increasing client expectations, competitions and shrinking margins will affect the industry.

Walgreen is further diversifying its business into household goods with no harmful chemicals. This step will help to add more store brands and differentiate itself from competitors. The company's first baby and personal care products, cleaners, paper products, and compact fluorescent light bulbs under the name Ology will be launched in more than 7,900 drugstores this week. The company's sales have been negatively impacted by the introduction of generic drugs in the past year. The exit from Express Scripts' pharmacy network from January this year had impacted Walgreen’s results, but the disputes are now settled and they have entered into a new multi-year pharmacy network agreement, effective Sept. 15.

Wait & Watch

CVS' cash and cash equivalents stood at $1.23 billion at the end of the current quarter. Year-to-date net cash from operating activities was $4.9 billion. The company’s accelerated share repurchase program that was announced in September 2012 should benefit itself by improving its earnings per share. CVS expects to retain about 60% of the prescriptions gained from the Walgreen and Express Scripts, thereby adding sustainable growth in revenue.

The contractual dispute between Walgreen and Express Scripts has come to an end, earlier in July, with both the companies announcing a multi-year retail pharmacy network agreement. The performance of CVS’ Pharmacy Services segment is enhancing mainly due to a significant increase of new clients. CVS is optimistic in retaining at least 60% of the new business, but as of now nothing is concrete. Although the company's prospects are strong and it should provide good diversification to an investor’s portfolio, the merger between Express Scripts and Medco Health Solutions in April this year has increased competition and will further effect profits. I recommend a hold for the company’s stock until it is able to materialize its anticipations.


tarunbachhawat has no positions in the stocks mentioned above. The Motley Fool owns shares of Express Scripts. Motley Fool newsletter services recommend Express Scripts. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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