Earnings Preview: CVS reports on 4Q Wednesday

CVS Caremark Corp. will give investors and analysts more insight Wednesday into how much the flu season and generic drugs have been helping the sector when it reports fourth-quarter earnings.

WHAT TO WATCH FOR: The flu returned this winter with renewed intensity after a couple of mild seasons. Higher-than-normal reports of flu started cropping up in several states before Christmas. This can help drugstore chains like CVS Caremark because it brings in more customers to stock up on prescriptions or pick up over-the-counter remedies for symptoms.

Gains from the flu may be countered a bit in the fourth quarter by Superstorm Sandy. The company said more than 1,000 stores were temporarily closed when the storm system swept up the East Coast last fall, and that could reduce fourth-quarter earnings by a penny.

The bottom line for CVS Caremark and other drugstore operators also has been helped by generic drugs for the past few quarters, and investors will want an update on that.

Blockbuster medicines like the cholesterol fighter Lipitor and the blood thinner Plavix, once the two top-selling drugs in the United States, have lost U.S. patent protection from generic competition. Generic drugs hurt pharmacy revenue because they cost less than brand-name products. But they help profitability because they provide a wider margin between the cost for the pharmacy to purchase the drugs and the reimbursement received.

Investors also will want an update on CVS Caremark's efforts to retain customers it gained during the split of competitor Walgreen Co. with Express Scripts Holding Co.

Walgreen and St. Louis-based Express Scripts let a contract between them expire at the end of 2011, but they resumed doing business last September. Walgreen fills prescriptions for Express Scripts, which runs drug plans for employers, insurers and other customers as a pharmacy benefits manager, or PBM. Many of Walgreen's customers migrated to CVS stores during the split because they needed a new place to fill prescriptions.

CVS Caremark said in November the new customers added about 3.5 cents per share to its third-quarter results, and they should add 2.5 cents in the fourth quarter.

In December, CVS backed its previous forecast for 2012 adjusted earnings of $3.38 to $3.41 per share. Analysts expect, on average, $3.40, according to FactSet.

CVS also said in December that it expects 2013 adjusted earnings of $3.84 to $3.98 per share, which topped analyst expectations at the time for $3.79 per share. Analysts now expect $3.92 per share.

Company shares closed 2012 at $48.35, a 19 percent gain from the end of 2011. That topped the Standard and Poor's 500 index increase of about 13 percent. The stock has already climbed 7 percent in 2013 and hit a 52-week high price of $52.73 in late January.

WHY IT MATTERS: CVS Caremark ranks 18th on the 2012 Fortune 500 list of biggest U.S. companies based on annual revenue. The company runs the second-largest chain of drugstores in the U.S. after Walgreen, and its Caremark unit is one of the nation's largest PBMs. CVS Caremark operates more than 7,400 drugstores.

WHAT'S EXPECTED: Analysts who cover the company expect, on average, earnings of $1.10 per share on $31.14 billion in revenue.

2011 QUARTER: CVS Caremark's net income climbed 4 percent, to $1.06 billion, or 81 cents per share, in the final quarter of 2011. Revenue jumped 15 percent to $28.32 billion, helped by a 32 percent increase in revenue from its PBM business.