Bulls see CVS smoking competition as earnings approach

Even with a ban on tobacco sales forecast to slow earnings, CVS Caremark Corp. shareholders still can’t seem to kick the habit of owning the stock. More

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Bulls see CVS smoking competition as earnings approach

Posted 5/1/14

NEW YORK – Even with a ban on tobacco sales forecast to slow earnings, CVS Caremark Corp. shareholders still can’t seem to kick the habit of owning the stock.

Calls on CVS’s shares are near the most expensive level relative to puts in more than six years, according to data compiled by Bloomberg. The price relationship known as skew, which decreases as options traders become more bullish, is currently about 35 percent less than the three-year average.

With 48 million uninsured Americans that may turn to government exchanges for health coverage, growth in CVS’s pharmacy business will offset money lost from cigarette sales, according to Scott Eun of Standard Life Investments Inc. The company, due to announce first-quarter results on Friday, has said the move to drop tobacco sales will cut earnings per share by 2 percent this year.

“CVS is becoming more and more of a health care company, as opposed to pure retail,” Eun, a Boston-based senior vice president and portfolio manager at Standard Life, which oversees $305 billion, said in an April 28 phone interview. “It’s positioning itself to be one of the first points of entry for people accessing the health care system. It’s not an investment that anyone will stress about.”

7,600 pharmacies

The operator of 7,600 pharmacies has been increasing its footprint in health care, opening 800 in-store clinics nationwide with nurses and physician assistants who can diagnose and write prescriptions for minor illnesses.

CVS, the largest U.S. seller of prescription drugs, is forecast to report first-quarter earnings per share of $1.04, an increase of 28 percent from the previous period, according to analysts’ estimates compiled by Bloomberg.

The options market is implying a one-day move of 2.7 percent following the report, more than the 1.8 percent gain or drop after the last eight announcements. The stock gained after seven of the last 10 releases.

Puts protecting against a 10 percent drop in CVS shares cost 3.91 points more than calls betting on a 10 percent rally on Wednesday, according to three-month data compiled by Bloomberg. Skew fell to 2.93 April 4, the lowest level since December 2007. The measure has three-year average of 5.98 points.

Carolyn Castel, a spokeswoman for Woonsocket-based company, declined to comment on the options.


CVS reported earnings that topped analysts’ estimates for the fourth quarter, citing an expanded roster of clients for specialty pharmaceuticals. The company is likely to keep adding customers, according to an April 13 client note from Leerink Partners.

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