Both Businesses Healthy At CVS

9/10/2012


  Recent Price
$46
  Dividend
$0.65
  Yield
1.4%
  P/E Ratio
15
  Shares (millions)
1,287
  Long-Term Debt as % of Capital
20%
  52-Week Price Range
$48.69 - $32.28

CVS Caremark's ($46; CVS) pharmacy-benefits management (PBM) unit filled or managed 775 million prescriptions last year, and its drugstores filled 20% of U.S. retail prescriptions.

Both units are delivering robust growth. Per-share profits are projected to surge at least 20% in the September and December quarters on double-digit sales gains. Growth will likely slow in 2013, though per-share profits are still projected to rise 13% on 4% higher revenue. CVS is rated Buy and Long-Term Buy.

Business breakdown

The PBM (54% of sales in the first half of 2012, 24% of operating profits) has regained its footing after losing multiple contracts in 2010. Sales surged 30% to $36.72 billion in the first half of 2012, with pressures on reimbursement rates partly offset by the growing use of higher-margin generic drugs.

So far this year, 77% of CVS' prescriptions have been generics, up from 74% a year earlier. The introduction of new generic treatments has improved profits at the PBM but pressured sales on the retail front. In the midst of the PBM selling season, CVS has a customer-retention rate of 96% this year.

The PBM faces renewed competition from Express Scripts ($63; ESRX), a rival now more than twice the size of CVS' unit after the April acquisition of Medco Health Solutions. Scale provides bargaining leverage in the PBM market, where companies receive discounts for buying drugs in bulk.

CVS' nearly 7,400 retail stores (46%, 76%) rely on prescription drugs for about two-thirds of revenue, followed by 16% from general merchandise, 11% for over-the-counter drugs and personal care, and 5% from beauty and cosmetics. After snapping up regional drugstores in recent years, the retail business now delivers strong organic growth. Total revenue grew 8% in the first six months of 2012, while same-store sales rose 7.0%, the company's best first half since 2006.

Retail results benefited from a rush of customers during the seven-month standoff between Walgreen ($36; WAG) and Express Scripts. The two companies have settled their differences, but pharmacy patients tend to be loyal, and CVS believes it can retain half of the customers who left Walgreen during the dispute.

CVS has grown its dividend at an annualized rate of 22% over the last five years, while buybacks have shaved 17% from the share count. About $1 billion remains on the share-repurchase plan, enough to reduce outstanding shares by nearly 2% at current prices. Recent operating momentum bodes well for additional dividend hikes. Free cash flow rose 37% to $2.78 billion in the first half of 2012, following a record $3.31 billion generated for full-year 2011.

Conclusion

Shares have advanced 11% this year but still trade at a discount to historical norms. At 15 times trailing earnings, the stock trades 2% below its five-year average and 15% below its 10-year average. An annual report for CVS Caremark Corp. is available at One CVS Drive, Woonsocket, RI 02895; (401) 765-1500; www.cvscaremark.com.

CVS CAREMARK
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jun '12
0.81
vs.
0.65
+ 5%
52.99
-
43.08
37 - 15
Mar '12
0.65
vs.
0.57
+ 9%
46.99
-
36.26
34 - 26
Dec '11
0.89
vs.
0.80
+ 7%
38.35
-
26.18
29 - 20
Sep '11
0.70
vs.
0.65
+ 14%
36.00
-
24.76
29 - 20
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
107.10
2.80
0.50
41.36
-
31.30
15 - 11
2010
96.41
2.69
0.45
37.82
-
26.84
14 - 10
2009
98.73
2.74
0.30
38.27
-
23.74
14 - 9
2008
87.47
2.44
0.26
44.29
-
23.19
18 - 10
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
86
72
66
79
53
82
50

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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