Without Tobacco, CVS Still Smoking

10/13/2014


  Recent Price
$83
  Dividend
$1.10
  Yield
1.3%
  P/E Ratio
19
  Shares (millions)
1,174
  Long-Term Debt as % of Capital
24%
  52-Week Price Range
$82.57 - $56.95

When drugstore chain and pharmacy-benefit manager CVS Health ($83; CVS) in February announced plans to stop selling cigarettes, Wall Street analysts' immediate responses ranged from nervousness to scorn. Yet so far this year, the company has outperformed rivals by a wide margin.

Cutting ties with tobacco will cost 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.

CVS, which filled 734 million retail prescriptions last year, is a Buy and a Long-Term Buy.

Healthy dose of growth

In the 12 months ended June, CVS grew sales 7%, per-share profits 19%, and cash from operations 21%. In contrast, rivals Walgreen ($61; WAG) and Rite Aid ($5; RAD) posted weaker sales growth, with per-share profits down at least 20%.

Last month, Walgreen reported August-quarter sales and per-share profits above market expectations. While Walgreen shares didn't do much on the news, the results bode well for CVS, which has delivered far better growth than Walgreen in recent quarters. CVS will declare September-quarter earnings Nov. 4, and the consensus projects 8% higher profits on 9% sales growth.

Walgreen also warned that Medicare's drug-reimbursement rates are likely to continue their two-year decline, which could crimp earnings in the year ahead. However, this isn't a new story, and CVS has managed to boost sales in recent quarters despite those lower reimbursements, helped by growth in prescriptions (5.2% in 2013 and 3.8% in the first half of 2014). The Affordable Care Act has created at least 10 million newly insured potential customers.

Rising prescription counts are not the only path to growth:

• CVS operates MinuteClinics — offices where customers can see nurse practitioners who specialize in family health care — 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%). PBM revenue rose 13% in the first half, lifted by new business and expansion of the specialty-pharmacy unit.

Consistency counts

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 — and earning a rank of 96 in our Quadrix® earnings-predictability metric.

You can obtain an annual report for CVS Health Corp. at 1 CVS Drive, Woonsocket, RI 02895, (401) 765-1500, www.cvs.com.

CVS HEALTH
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jun '14
1.13
vs.
0.97
11%
79.43
-
72.37
19 - 17
Mar '14
1.02
vs.
0.83
6%
76.36
-
64.95
19 - 16
Dec '13
1.12
vs.
0.97
5%
71.99
-
56.32
19 - 15
Sep '13
1.05
vs.
0.85
6%
62.36
-
56.67
17 - 16
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2013
126.76
3.96
0.90
71.99
-
49.00
18 - 12
2012
123.13
3.42
0.65
49.80
-
41.01
15 - 12
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
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
88
78
56
82
45
86
85

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


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