Medco Health Solutions (NYSE:MHS) looks to have hit some headwinds, but its growth is far from finished. The pharmacy benefits management giant posted good top-line growth, surging earnings, and burgeoning cash flows from operations in its latest quarter. Yet its stock took a nearly 12% beating in heavy trading in the wake of Tuesday's earnings report.
The problem? Medco's results were pretty good, but they weren't as strong as everyone had been expecting. The Franklin, N.J.-based company's revenue rose 7.2% year over year, a respectable increase considering that Medco had to add $600 million to the top line to hit that number. Below $9.3 billion of revenue, earnings for the quarter were up 32.7% to $156.7 million, which amounted to $0.53 per share. Cash flow from operations for the first nine months of the year, meanwhile, reached $901.5 million.
Despite this seeming robustness, Medco's earnings didn't measure up to everyone's expectations. Further, it let down analysts on future guidance. The company's 2005 forecast calls for earnings per share between $2.38 and $2.40, which includes a $0.09 tax benefit; the consensus estimate had been $2.38 without the tax help. In addition, Medco puts 2006 EPS at between $2.52 and $2.64, well below analysts' figure of $2.79.
In fact, there is a sign of sluggishness at Medco. Prescriptions dispensed through its mail-order operations were down year over year because it lost the Federal Employee Health Benefit Plan as a client. What's more, retail pharmacies such as Walgreen (NYSE:WAG) and CVS (NYSE:CVS) are horning in on the mail-order game, adding to competition from companies like Express Scripts (NASDAQ:ESRX).
But Medco's long-term prospects are hardly dismal. As the largest competitor in the space, Medco can fight the good fight in mail order. In addition, the company now has a strong position in the exploding specialty-pharmaceutical area. And let's not forget that it's on track to offer Medicare's drug benefit that goes into effect next year. With those pieces in place, Medco won't have any problem generating strong growth over the long term.
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Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
