CVS Succeeds On 2 Business Fronts

3/18/2013


  Recent Price
$52
  Dividend
$0.90
  Yield
1.7%
  P/E Ratio
16
  Shares (millions)
1,249
  Long-Term Debt as % of Capital
19%
  52-Week Price Range
$52.77 - $43.08

CVS Caremark ($52; CVS) set all-time highs last year for sales, net income, and cash provided by operations, all up at least 12%. Although sales growth will likely slow in 2013, in February management raised its outlook for per-share profits, now projected to climb 12% to 16%.

Shares trade at 16 times trailing earnings, a 7% premium to their five-year average of 15 but 12% below the median for S&P 1500 consumer-staples stocks. Even if the P/E ratio reverts to 15, should CVS meet the midpoint of its 2013 profit range, shares will advance 12% over the next year.

CVS Caremark is a Focus List Buy and a Long-Term Buy.

A hybrid business model

Investors often penalize conglomerates, preferring to take on the responsibility of diversification themselves through pure-play investments. But CVS has gotten mileage from the pairing of two distinct businesses. The pharmacy-benefits manager (PBM) accounted for 52% of 2012 sales, and the retail drugstore chain 48%.

The PBM is driving CVS' growth. Sales rose 18% last year and 24% in 2011. Membership growth is accelerating for Maintenance Choice, a program that lets some members of the PBM fill prescriptions at CVS retail pharmacies at the same price as mail order.

That momentum comes even as CVS faces renewed competition from Express Scripts ($60; ESRX), a rival more than half again its size after the April acquisition of Medco Health Solutions. Scale provides bargaining leverage, with PBMs receiving discounts for buying drugs in bulk and then passing on some of those savings to patients enrolled in benefit plans.

For the 2013 selling season, CVS' PBM has retained 96% of its business so far, with 85% of contract renewals completed. In addition, the PBM has signed up $400 million in net new business. Rising use of generic treatments (79% of drugs dispensed in 2012, versus 73% in 2010) continues to improve the segment's profitability, while constraining sales on the retail side.

For years, the retail business grew by feasting on smaller rivals, with CVS spending billions to acquire drugstore chains such as Revco, Arbor, Eckerd, Save-On, Osco, and Longs. Since 2006, the store count has soared 20%. Store expansion has slowed in the past four years, but CVS has shown it can still grow with assets already in place.

Same-store sales rose 5.6% in 2012 — the strongest advance since 2006. The results were partly helped from CVS grabbing new customers during the impasse between Express Scripts and Walgreen ($43; WAG). Management expects to retain 60% of shoppers who migrated from Walgreen during the dispute, which ended in September.

Free cash flow advanced 15% to a record $3.81 billion last year, and CVS is passing on that excess cash to shareholders. In December, CVS hiked its quarterly dividend 38% to $0.225 per share, following hikes of 30% in 2011 and 42% in 2010. Buybacks shrank the share count 5% last year, with CVS paying an average price of $45.58 per share. An annual report for CVS Caremark Corp. at One CVS Drive, Woonsocket, RI 02895; (401) 765-1500; www.cvs.com.

CVS CAREMARK
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Dec '12
0.97
vs.
0.89
11%
49.80
-
44.33
16 - 14
Sep '12
0.85
vs.
0.70
13%
48.69
-
43.65
16 - 14
Jun '12
0.81
vs.
0.65
16%
46.93
-
43.08
16 - 15
Mar '12
0.65
vs.
0.57
20%
45.88
-
41.01
16 - 15
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2012
123.13
3.27
0.65
49.80
-
41.01
15 - 13
2011
107.10
2.80
0.50
41.35
-
31.30
15 - 11
2010
96.41
2.69
0.35
37.82
-
26.84
14 - 10
2009
98.73
2.74
0.31
38.27
-
23.74
14 - 9
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
95
88
74
80
53
95
55

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


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