With a maneuver that was borrowed straight from a schoolyard, while Walgreen Company (NYSE:WAG) and Express Scripts Holding Company (NASDAQ:ESRX) were busy bullying one another, CVS Caremark Corporation (NYSE:CVS) quietly stepped in and stole both of their proverbial lunches. While it's not a trick that ESRX and WAG will let CVS play again, the damage has already been done.
The good news: CVS Caremark had a kick-butt quarter in Q3, earning $0.85 per share, up 21% compared to the year-ago number. Revenues were up 13% on a year-over-year basis, reaching a record of $30.2 billion.
The bad news: What CVS won largely came out of the pockets of Express Scripts Holding and Walgreen Company. The two companies were hashing out a new contract after the old contract expired last year. However, slow (and tense) negotiations between ESRX and CVS meant a key segment of customers for both organizations went largely unserved up until September when the two corporations finally struck a new deal. By that point though, it was too late - CVS Caremark had already won a huge number of customers from Walgreen.
And make no mistake.... the stand-off between Express Scripts Holding Company and Walgreen Company did and will take a toll. Though Express Scripts Holding Company beat on revenue as well as earnings, and topped last year's comparable as well, analysts still deemed the current ESRX outlook for 2013 'overly aggressive.' Walgreen's fiscal calendar isn't aligned very well with Express Scripts'; the company posted its most recent quarterly results in early September. Per-share profits were down from $0.57 to $0.53 then, missing estimates. Walgreen also said same-store sales fell 5.9% in October - after the ESRX deal had been renewed - underscoring problems that customers just aren't dismissing.
CVS, on the flipside, said the dispute between ESRX and WAG meant additional earnings of $0.035 for Q3, and would continue to boost the top and bottom line; CVS Caremark believes it will be able to keep 60% of the new customers it attracted from Walgreen while it and Express Scripts Holding were unable to draft a new partnership. CVS ramped up its full-year profit outlook by about 1.5%.
As one might expect, Express Scripts Holding and Walgreen Company shares are in the red today on the news. Yet, CVS Caremark shares are also in the red today despite the clear edge it has on its competitor, and its competitor's partner. What gives? In simplest terms, the market's not a bit surprised that CVS Caremark's third quarter was so strong; it was already priced in. Still, CVS is very well-positioned for the future, making it a buy while WAG is probably best deemed a hold and ESRX a sell.