Caremark: Medicare Winner

12/05/2003 12:00 am EST

Focus:

James Oberweis

President, Oberweis Asset Management, Inc.

"As with most significant political legislation, including the recent Medicare bill, there will be clear winners and losers," says Jim Oberweis, editor of The Oberweis Report." Among the winners will be the pharmacy benefit managers, or PBMs." Here, the advisor and money manager offers his top pick in the sector.

"Pharmacy benefit managers are the companies, which administer pharmacy benefit programs on behalf of healthcare programs and insurance companies. PBMs will play a prominent role in the administration of the Medicare prescription benefit. Although the details are not yet clear, we believe it safe to assume that growth is a given for the major PBMs. Caremark (CMX NYSE) is one of the nation’s largest and leading prescription benefit managers. The company has announced a merger agreement with Advance PCS, another leading PBM. Caremark dispenses prescription drugs to customers through a network of over 55,000 third-party retail pharmacies and through its own mail-service pharmacies. It s customers are primarily sponsors of health-benefit plans (employers' insurance companies, unions, government-employee groups and managed-care organizations and individuals located throughout the US).

"The stock is up about 60% this year, probably in anticipation of this bill. But at least a portion of the gain can also be attributed to increased earnings. Caremark’s earnings grew 60% in 2002. On a P/E basis, Caremark is trading at about 20 times forward 12 months earnings estimates, which is on the high end of this year’s range but not outside of the stock’s historical P/E range. In short, while not oblivious, we believe that the market may be underestimating the influence that the recent Medicare legislation will have on the PBMs. When combined with solid growth outside of Medicare, we think PBMs in general and Caremark in particular are well-positioned for a favorable 2004. Be aware that this company is considerably larger in market capitalization than our average recommendation. It is a rare event indeed for us to add a mid-cap name to our Model Portfolio, but we believe that Caremark is a well deserved exception. Clients of Oberweis Asset Management own approximately 280,000 shares. These shares may be appropriate for risk-oriented investors."

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