CVS Ready To Run In 2014

1/13/2014


  Recent Price
$70
  Dividend
$1.10
  Yield
1.6%
  P/E Ratio
18
  Shares (millions)
1,226
  Long-Term Debt as % of Capital
19%
  52-Week Price Range
$71.99 - $49.68

CVS Caremark ($70; CVS) shares have soared in the past three months, handing investors a 23% total return, compared to an average of 8% for S&P 500 Index consumer-staples stocks. At 18 times trailing earnings, CVS trades 3% above its 10-year average but 12% below the sector median. Analyst earnings estimates have risen since CVS gave its 2014 outlook last month, which implies per-share-profit growth of 10% to 14%.

A reasonable valuation, favorable outlook, and strong track record earn CVS Buy and Long-Term Buy ratings.

Business breakdown

CVS delivered sales growth of at least 10% in nine of the past 10 years. Growth has decelerated, with revenue up just 2% in the first nine months of 2013. Recent sales gains have been fairly evenly split between the pharmacy-benefit manager (54% of revenue for the nine months ended September, 32% of total operating profit) and drugstore chain (46%, 68%). Retail same-store sales rose 0.9% during the nine-month period, largely due to a 4.8% rise in same-store prescription volumes.

Operating momentum is improving. CVS reported a 6% jump in sales for the September quarter. Rival Walgreen ($58; WAG) posted 6% growth in the three months ended November, which could bode well for CVS in the December quarter. The consensus projects 4% sales growth.

Moreover, wider use of generic drugs — cheaper in price than their branded counterparts and more profitable for CVS — has helped fatten profit margins. In the first nine months of 2013, the PBM's operating margins jumped to 9.5% from 8.6% in the year-earlier quarter, while the pharmacy's margins rose to 3.9% from 3.0%.

The PBM should benefit from expanded coverage offered by the Affordable Care Act, with management expecting 30 million Americans to gain health insurance by 2018. CVS' pharmacy-benefit manager has exposure to insurance exchanges in 25 states, accounting for almost 70% of the eligible exchange population. PBM growth should contribute to higher foot traffic at CVS retail pharmacies.

Other catalysts could help drive long-term growth. Through a venture with Cardinal Health ($68; CAH), CVS will receive a $25 million payment each quarter and gain substantial purchasing power with generic drugs. A planned $2.1 billion acquisition will push CVS into the high-growth area of home infusions. CVS expects per-share profits to climb 10% to 14% annually over the next five years.

Share repurchases should also contribute to the higher per-share profits, with management announcing a fresh $6 billion share-buyback program in December. CVS has lowered its share count 4% in the past year and by nearly 9% over the last two years.

CVS has raised its dividend at least 20% in four consecutive years, the most recent a 22% boost in December. Management expects to return to investors 35% of earnings through dividends by 2018, versus the current payout ratio of about 24%. To reach that level, CVS estimates it will have to grow the dividend at an annual rate of 18%.

An annual report for CVS Caremark Corp. can be obtained 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
Sep '13
1.09
vs.
0.85
6%
62.36
-
56.67
17 - 16
Jun '13
0.97
vs.
0.81
2%
60.70
-
53.94
18 - 16
Mar '13
0.83
vs.
0.65
0%
56.07
-
49.00
17 - 15
Dec '12
0.97
vs.
0.89
11%
49.80
-
44.33
16 - 14
           
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
2.63
0.30
38.27
-
23.74
15 - 9
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
94
69
66
88
50
94
78

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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