Friday, November 06, 2009

Anatomy of a Murder…on Wall Street



There are a lot of ways to describe a stock that goes down a lot in a brief period of time.

These include “tanked,” “dived,” “collapsed,” “got crushed,” “got smoked,” “got murdered,” and many others—including some unprintable adjectives we’ll leave to the imagination.

Yesterday, shares of CVS Caremark did all of those things and more, after the company disclosed bad news in the form of contract losses in its not-long-ago-acquired Caremark pharmacy benefit management business.

What made matters worse was the way in which CVS management announced its problems.

In a press release issued at 7 a.m. E.S.T., titled “CVS Caremark Reports Record Third Quarter 2009 Results,” CVS boasted about “record third quarter revenues, operating profit, and net income,” with not a word about the contract losses in the PBM business.

Indeed, the initial reports from Wall Street’s Finest—before the 8:30 a.m. management conference call—included no hint of a problem.

“PBM held in, retail pharma did better. Revs were in line. Profitability was higher...” was one such recap; “CVS reported Q3 eps of .65, a penny better,” was another.

And even after the call started, first with the normal “forward looking statement” preface by the IR woman, and then with a hearty “Thanks Nancy and good morning, everyone” from CEO Tom Ryan, not a hint of a problem came in the first 21 paragraphs of his commentary.

“We reported another excellent quarter this morning,” Ryan began. “And I’m certainly pleased with our results across the Company…”

Ryan then spent 14 paragraphs discussing the retail business—including the opening of the 7,000th CVS in a place called Little Canada, Montana (“Who knew?” Ryan joked)—before getting to the PBM business itself.

“Now, let me turn to the PBM business, which also had a very good quarter,” Ryan began.

Give the guy credit for nerves.

He then spent seven paragraphs describing various “innovations” and “new products” that were “gaining traction” in the PBM business, before dropping the bomb in the 21st paragraph of his remarks:

“So let me talk about the selling season. We had some good wins…. Having said that, we had some big client losses….”

And thus began the deluge.

Wall Street’s Finest reacted, as you’d expect, with surprise, annoyance, and not a little bit of anger: the question-and-answer session was not at all pretty.

And while CVS management did allow the call to go well beyond the normal one-hour time limit for these things, the commentary itself—from Ryan’s first “Thanks Nancy,” to his concluding “I know this was obviously a difficult call”—it is instructive for anyone wanting to learn how not to deliver bad news.

As an anatomy of a murder on Wall Street, in fact, it doesn’t get more gruesome than this.


Jeff Matthews
I Am Not Making This Up


© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.


4 comments:

rob said...

Of course, not mentioning in the press release that they were the subject of an investigation by the FTC doesn't help either (only mentioned in the 10-Q)

PhillipCharles said...

It befuddles the mind that men (and women) of such experience would think that by attempting to bury bad information which effects a company so widely followed that it would either be overlooked or excused. Is it not obvious that all you can do in this situation is put it out there early and take your punishment? Anything else is simply offensive, even to those of us of have no interest in CVS as an investment.

Turniptruck said...

"It takes less time to do a thing right than to explain why you did it wrong."
— Henry Wadsworth Longfellow

CVS will now be doing time on the 'Too Hard Pile'.

CrocodileChuck said...

What's 'PBM'?