A Retailer That's Doing Just Fine

08/06/2009 11:00 am EST


Charles Carlson

Editor, DRIP Investor

Charles Carlson, editor of DRIP Investor, says drugstore chain CVS Caremark should survive the recession and health care reform without a scratch.

Regardless of how you analyze the company, CVS Caremark (NYSE: CVS) stands out.
CVS operates two segments. Retail drugstores generated 53% of sales in 2008, while pharmacy-benefit management (PBM) accounted for the rest. Prescription drugs account for about two-thirds of retail sales, with the balance coming from general merchandise (15%), over-the-counter drugs and personal care (13%), and beauty/cosmetics (4%).

The PBM unit contracts with employers, insurance companies, and other sponsors of health-benefit plans to administer drug coverage for groups.

Typically, a PBM will buy drugs in bulk at a discount and pass on some of the savings to patients in its benefit plans. CVS entered the PBM business via its $26.5-billion acquisition of Caremark in 2007.

Melding a PBM operation with a drugstore chain provides opportunities for cross-marketing services. CVS should be one of the few companies posting higher per share profits in 2009. The consensus estimate for 2009 is $2.60, up from $2.44 per share in 2008. That estimate could prove conservative, as CVS has beaten the consensus earnings estimate in each of the last two quarters.

(On Tuesday, the company reported earnings rose 15% in the second quarter while revenue increased 18%. It also raised its guidance on earnings this year to $2.59—$2.64 a share, from the earlier $2.53—$2.63. The stock rose more than 1% Wednesday to close above $39—Editor.) 

Dividends have risen nicely in recent years, including a 10% hike in the payout at the beginning of this year. The stock currently yields nearly 1%.

The stock scores a 90 out of a possible 100 in our Quadrix® stock rating system. (Quadrix ranks more than 4,000 stocks based on more than 100 different variables. CVS’s overall Quadrix score means it scores better than 90% of the stocks in the Quadrix universe.)

CVS’s Sector score—a score devised by evaluating the metrics that have the most influence over performance in that particular sector—is also impressive at 95 out of a possible 100.

Although health care-related stocks have been affected by uncertainties surrounding health care reform, CVS stands to be one of the winners should more people obtain insurance coverage.

The good news is that investors can buy this stock at what appears to be an attractive valuation at just 11x 2010 consensus earnings of $3.00 per share. Profit growth should accelerate in 2010, and long-term growth prospects are excellent. The stock, down sharply from its 2008 high of more than $44 per share, represents one of the better buys in the market.

CVS offers a direct-purchase plan whereby any investor may buy the first share and every share directly from the company.

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