CVS: No Smoking

10/17/2014 8:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

Since announcing plans in February to stop selling cigarettes, this leading drugstore chain has outperformed rivals by a wide margin, observes Richard Moroney, editor of Dow Theory Forecasts.

Cutting ties with tobacco will cost CVS (CVS) about $2 billion in annual sales, or 1.5% of revenue. However, going smokeless may enhance CVS Health’s appeal as a partner to employers and insurance companies, an image upgrade that could boost sales in the years ahead.

In the 12 months ended June, CVS grew sales 7%, per-share profits 19%, and cash from operations 21%; the results bode well for CVS, which will declare September-quarter earnings November 4.

The Affordable Care Act has created at least ten million newly insured potential customers. And rising prescription counts are not the only path to growth.

CVS operates MinuteClinics—offices where customers can see nurse practitioners who specialize in family healthcare—at more than 900 of its roughly 7,700 stores. The company targets 150 new MinuteClinics in 2014 and a total of 1,500 nationwide by 2017.

In the first half of 2014, CVS opened a net 45 stores, with a target of 2% to 3% growth in square footage for the year.

The pharmacy-benefit manager (66% of revenue in the first half of 2014, 31% of operating profit) is delivering more growth than the retail business (34%, 69%). 

Analysts expect per-share-profit growth of 12% this year, 13% next year, and 14% annually over the next five years. Notice the narrow spread of the estimates?

CVS is a picture of consistency, growing per-share profits in 11 of the last 12 years—a feat managed by less than 9% of the companies in the S&P 500 index (SPX)—and earning a rank of 96 in our Quadrix earnings-predictability metric. CVS is a Long-Term Buy.

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