John W. Ransom
Raymond James & Associates
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
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.