Stock Picks: CBS Up, CVS Down

Investors tuned in to CBS (CBS) and broadcast positive signals Thursday before the media conglomerate announced quarterly earnings results, scheduled for after the market close. Shares rose 6% in midday trading.

Media companies have seen better days. The industry has been battered by the double whammy of declining ad rates and an explosion of digital transmission platforms that have broken broadcast networks' stranglehold on distributing content such as television programs, news and music.

Yet, CBS looks relatively solid. Wall Street analysts expect the company to earn 22 cents a share, down from 40 cents a year ago.

Deutsche Bank analyst Doug Mitchelson said in a preview note on Oct. 23 that he'd raised his own 12-month price target 18%, to $13.00 a share.

He said ad pacings are ramping up. The network scatter market – the market for ads bought during the TV season, as opposed to the one for ads purchased during the spring “upfronts" period, when programs are launched – is better than expected, and management commentary that TV production profits will stay flat for 2010 improved the picture for CBS.

That's not to say CBS is in a growth business. "Over the next few quarters the debate on CBS will shift from how much estimated upside exists relative to an ad recovery back to what is the right valuation for this basket of assets," Mitchelson said.

Bottom Line: Hold
This business isn't going away, but its grasp on the airwaves isn't what it used to be, either.

Pharmacy benefit manager CVS Caremark (CVS) doled out bitter medicine to investors Thursday after the pharmacy announced it had lost some important customers for the 2010 buying season.

Shares plunged 20% in midday trading.

The company reported earnings of 71 cents a share, up from 50 cents a share a year earlier. Wall Street analysts on average had expected earnings of 64 cents a share.

But CVS Caremark CEO Tom Ryan said several large clients canceled contracts would hurt the firm’s prospects in 2010, and he projected growth rates would fall short.

"To get to that 13% to 15% growth rate, I expected strong double digit growth in our retail business, which I still do, and I expected low- to mid-single digits in our pharmacy benefit management, which is not going to happen," he said in a conference call on Thursday. "We lost more [prescription benefits manager] business than we expected."

Deutsche Bank analyst Bill Dreher spotlighted some positive aspects, such as an 8% increase in pharmacy same-store sales and a lower-than-expected margin drop of 71 basis points.

However, David Magee, an analyst at SunTrust Robinson Humphrey, suggested in a Tuesday preview note that the pharmacy benefit management unit would be a weak link.

"Visibility on the PBM part of the business isn't great and it looks like overall PBM revenue will be flat to down," he wrote. "It seems that Caremark is still having difficulty gaining net share from the larger competitors."

Nevertheless, he said the stock was cheap at its current price, and kept his Buy rating.

Bottom Line: Buy
People will always get sick, and a dip this large should present a buying opportunity, despite the PBM unit weakness.