CVS Caremark shares outpaced the broader market Tuesday after the drugstore chain raised its earnings forecast for the start of 2014 and reassured investors that its business can absorb the financial hit coming from a decision to stop selling tobacco products.
The Woonsocket, R.I., company also reported fourth-quarter earnings that climbed more than 12 per cent and edged past Wall Street expectations.
CVS Caremark Corp. gained national attention last week after it promised to phase out sales of tobacco products from its more than 7,600 drugstores nationwide.
The company, like other drugstore chains, has been adding in-store clinics and seeking to work more with health care providers to manage patient care. CEO Larry Merlo said then that tobacco has no place in a health care setting like that.
CVS Caremark also said it expected the move to help expand that business with other care providers, but it didn't forecast what sort of gain it will reap. It did, however, say that pulling tobacco products will lead to a $2 billion loss in annual revenue and an earnings hit that will equate to between 6 cents and 9 cents per share this year.
The company also said its business was strong enough that it can absorb that hit and not change its full-year forecast. On Tuesday, it backed up that sentiment by raising its forecast for first-quarter earnings to $1.03 to $1.06 per share from 96 cents to 99 cents.
That topped average analyst expectations of 98 cents per share, according to FactSet.
Better generic drug pricing contributed to the forecast hike, and the performance of CVS Caremark's pharmacy business made it clear that the company will be able cope with tobacco withdrawal, according to Jeff Jonas, a portfolio manager for Gabelli Funds.
What remains unclear, though, is how the company's health care business will grow in the long term because it plans to kick tobacco sales.
"They have this huge (public relations) halo now, but that's going to fade," Jonas said. "It's just really hard to translate that good will and reputation into actual business."
Morningstar analyst Vishnu Lekraj, who also covers drugstores, has said that doctors and hospitals will be concerned most with who gives them the best deal when they look for a pharmacy partner.
CVS executives told analysts Tuesday that they think the tobacco move will help bring in business, as long as they offer reasonable prices and also serve their clients properly. They noted that accountable care organizations, which co-ordinate care among doctors, specialists and hospitals, focus on the role tobacco plays in exacerbating chronic conditions like high blood pressure and try to help patients quit.
Aside from offering tobacco-free stores, CVS Caremark also provides smoking cessation help through its in-store clinics and will train pharmacists to counsel customers on kicking the habit.
"We are seeing this tobacco decision as an opportunity to connect even more with consumers as an expert in health and beauty and to build our loyalty with them," said Helena Foulkes, president of the company's pharmacy business.
For the quarter that ended Dec. 31, CVS Caremark earned $1.27 billion, or $1.05 per share. That compares with earnings of $1.13 billion, or 90 cents per share, in the final quarter of 2012. Revenue rose nearly 5 per cent to $32.83 billion, helped in part by gains from its Caremark unit, which is one of the nation's largest pharmacy benefits managers.
Adjusted earnings totalled $1.12 per share.
Analysts expected earnings of $1.11 per share on about $32.67 billion in revenue.
CVS Caremark shares rose 2.6 per cent, or $1.74, to $68.68 in afternoon trading, while the Standard & Poor's 500 index climbed less than 1 per cent.