Caremark's Room to Grow

Caremark Rx (NYSE:CMX) continued its run of solid earnings reports with yesterday's third-quarter results. Nevertheless, the market bid the stock down in heavy trading, perhaps due to hypersensitivity to the firm's near-term growth prospects. For some investors, though, Wall Street's jitters could become an advantage.

The pharmacy benefit management company's third-quarter revenue rose 8% year over year to $8.1 billion, while net income rose 34.7% to $231.4 million. On a per-share basis, Caremark earned $0.51 this quarter, compared to $0.37 in the same period last year.

Mail orders were one of Caremark's biggest growth drivers. Caremark's mail-order drug business is more profitable than its retail segment, since it lets the company cut out middlemen like Walgreen (NYSE:WAG). Mail pharmacy revenue increased 33% to $2.9 billion in the third quarter, driven by a 23% rise in mail claims. Even with that increase, Caremark has plenty more room to convert customers to mail order; it logged 14.6 million mail claims this year, compared to 116.3 million retail claims.

Generic drugs also boosted Caremark's profits, since the company can get bigger discounts on generics than branded medicines. There's room for expansion here as well, since generic dispensing rates for the quarter were 39.8% for the mail unit and 53.7% for retail.

Positive trends led the company to settle on 2005 earnings guidance of $1.97 per share, at the high end of its previous $1.95 to $1.97 forecast. The company likewise issued strong projections for 2006 -- EPS growth of at least 16.7%, and as much as 20.8% before expensing for stock options. This is strong growth, especially given the high initial expenses the firm will incur in fulfilling the Medicare drug benefit.

Much like its competitor Medco (NYSE:MHS), Caremark's long-term prospects look solid, even if investors are cagey. Americans won't stop looking for ways to lower their drug bills, and prescriptions by mail will remain a major way to do so. Investors looking for a long-term holding may want to mark a place in their portfolio for Caremark.

We prescribe further Foolishness:

• Caremark Hits the Mark Again
• Medco's Bitter Pill

Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.