From the December 2012 issue of Research Magazine • Subscribe!

Growth Path

Steady improvements in job numbers and home values should help boost consumer spending, analysts say.

John W. Ransom
Raymond James & Associates
800-248-8863

This morning [Nov. 6] CVS Caremark (CVS) reported amortization-adjusted 3Q12 EPS of $0.85, ahead of consensus ($0.83, ex-one $0.97 outlier) and above the high end of provided guidance ($0.81-0.83). As expected, CVS reported strong performance in the retail segment as the company continues to benefit from the Express Scripts network changes as well as robust generic performance, with retail EBIT (earnings before interest and taxes) growth of 16.2% versus 15.0-17.0% guidance (our estimate was 16%). 

That said, the upside in 3Q was driven by robust performance in the PBM (pharmacy benefit manager) segment and was ahead of previously provided views, with profits increasing 19.3% (4.0-7.5% goal; our estimate was 5.5%). 

As expected, management raised 2012 EPS guidance by $0.05 at the midpoint to $3.38-3.41, implying 4Q12 of $1.07-1.10, in line with the $1.08 consensus outlook, with management now expecting at least 60% Express Scripts retention (up from 50% previously). 

Net-net, 3Q12 results confirm solid execution out of CVS, and we would expect this trend to continue as the company further benefits from generic growth and leverages recent PBM investments; that said, we acknowledge relative outperformance year to date and likely broader concerns surrounding replicating 2012 success in 2013 (guidance expected in December).

Implied 4Q12 guidance in line, could prove conservative: CVS raised 2012 EPS guidance by $0.05 at the midpoint to account for the 3Q outperformance and greater Express Scripts retention (new range is $3.38-3.41). Consensus stands at $3.37. 

David Whiston, CFA, CPA, CFE
Morningstar
312-696-6000
David.Whiston@morningstar.com

Toyota Motor Corporation (TM) reported second-quarter fiscal 2013 results [on Nov. 5] that gave investors reason to be optimistic for the rest of the fiscal year. We are leaving our fair value estimate unchanged. Although management lowered its fiscal 2013 revenue guidance to Japanese Yen (JPY) 21.3 trillion ($261.4 billion) from JPY 22 trillion ($27.4 billion), operating income guidance increased to JPY 1.05 trillion ($12.4 billion) from JPY 1 trillion ($12.4 billion) while earnings per share guidance increased to JPY 246.3 ($3.06) from JPY 239.99 ($2.99). The rate guidance for the second half of fiscal 2013 is for JPY 78/dollar, which we think is reasonable, given current spot rates, and could end up being conservative. 

Toyota’s cost-reduction efforts are paying off despite major uncertainties in China and Europe. The prior year’s second quarter was an easy comparable because of the impact of the earthquake in March 2011, but we still found [recent] results encouraging. 

Second-quarter revenue increased more than 18% to JPY 5.4 trillion ($67 billion) from the prior year’s quarter, while gross margin excluding the captive finance arm increased 430 basis points to 13.6%. Higher volume also helped Toyota absorb more of its fixed costs as selling, general, and administrative expense as a percentage of sales declined 80 basis points to 9%. 

This currency headwind was better than the JPY 40 billion ($498 million) headwind in the first quarter. Management’s cost-cutting efforts and new product rollouts in the United States, such as the new Avalon and RAV4, led management to be more optimistic than three months ago, and we agree.

Zacks Investment Research
312-265-9339
Zacks.com

Toyota occupies the No.1 spot in hybrid offerings. Since 1997, the automaker sold more than 3.4 million hybrid vehicles until December last year. It expects to launch as many as 10 more gasoline-electric models by 2015 and offer a fuel-sipping option across its entire line-up by 2020. The automaker dominates the hybrid market with its Toyota and Lexus offerings as well as the Prius hybrids, introduced in 1997. 

Last year, Toyota launched the revamped version, Prius Alpha, in both 5-seater and 7-seater versions. Furthermore, Toyota will start delivering the plug-in (PHV) version of Prius hybrid that poses a significant threat to Nissan Motors Leaf electric car and General Motor s Volt PHV. 

It also launched the world’s best fuel-efficient gasoline-electric hybrid car in Japan, known as Aqua. The car, which will be marketed in the U.S. as Prius C, delivers 35.4 kilometers per liter (83.3 miles per gallon), beating the mileage of the current Prius model that gives 32 kilometers per liter. 

Christopher Ferris 
Noble Financial Capital Market
646-429-1727
cferris@noblefcm.com

1-800-Flowers reported solid revenue growth in its key Consumer Floral and BloomNet [Wire Service] business, exceeding our estimates. Consumer Floral posted its 7th straight quarter of growth at 4%, an acceleration from the prior quarter and coming against a very challenging 12% comparison. BloomNet revenue accelerated to 7% growth-based on the continued market penetration. Gross margins expanded across the board, and the company posted EBITDA and EPS results largely in-line with our estimates and consensus. 

We encourage investors to consider FLWS shares at their current, attractive level ahead of the holiday season and the prospect of improving gifting results. Our $5 price target implies nearly 50% upside from current levels.

Daniel L. Kurnos, CFA
Benchmark Company
561-961-5113 
dkurnos@benchmarkcap.com

1-800-flowers.com (FLWS) reported F1Q13 (September 2012) revenue of $120.9 million, up 3% year-over-year (y/y), exceeding consensus and our estimate of $120 million on strength in Consumer Floral despite the absence of any major gifting holidays. 

Importantly, guidance of mid-single digit revenue and double-digit cash flow and EPS growth was reiterated. 

We think these results, along with the reiterated guidance, confirm that Flowers remains on a positive long-term growth trajectory, with shares attractively priced at under four times calendar 2013 enterprise value (EV)/EBITDA.

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