CVS Expanding On Two Fronts


  Recent Price


  P/E Ratio
  Shares (millions)
  Long-Term Debt as % of Capital
  52-Week Price Range
$44.29 - $23.19

CVS Caremark ($32; CVS) operates more than 6,900 drugstores and fills or manages more than a billion prescriptions a year — the most in the U.S.

A fairly defensive name, CVS boasts a solid balance sheet and strong cash flow. Operating cash flow climbed 22% in the past 12 months.

As many retailers struggled for survival, CVS grew same-store sales by more than 3% in each quarter since the economy began to slow in late 2007. With strong growth outlooks for both revenue and profits, CVS is a Buy and a Long-Term Buy.

Business breakdown
CVS operates two segments. Retail stores generated 53% of sales in 2008, while pharmacy-benefit management (PBM) accounted for the rest.

The retail unit has grown revenue 11% in the past 12 months. 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%).

PBM revenue rose 2% over the last 12 months, but the unit could reap big rewards in coming years as baby boomers age. 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, then pass on some of those savings to patients in its benefit plans.

Not surprisingly, this attractive market is drawing new competition. In May, Wal-Mart Stores ($49; WMT) announced plans to expand a pilot program selling prescription drugs direct to companies.

Size matters
CVS has grown enormous on a rich diet of smaller competitors, swallowing them and adroitly folding them into its operations. Since 1997, CVS has completed more than six deals worth at least $1 billion apiece.

The list of acquisitions includes once-familiar drugstore names such as Revco, Arbor, Eckerd, Save-On, Osco, and Longs. The Longs acquisition, completed for $2.7 billion late last year, added 521 stores and expanded CVS’ presence in California, Hawaii, Nevada, and Arizona. Also included in the deal was a PBM unit with more than 8 million members.

The $26.5 billion acquisition of Caremark in 2007 changed the game for CVS. Adding a huge PBM to a company that already operated thousands of drugstores opened up opportunities for cross-marketing unavailable to anybody else in the industry. A pharmacy trade group has gone to the Federal Trade Commission with allegations that CVS is unfairly using its joint business model to steer PBM customers to its retail stores by hiking co-payments for prescriptions filled elsewhere. While this issue makes good headlines, we don’t expect it to have much effect on operating results.

Analyst estimates for per-share earnings have increased over the last month, with the consensus now projecting 15% growth this year and a 14% jump in 2010. Despite the healthy outlook, shares trade at 13 times trailing earnings, well off the five-year average of 20. An annual report for CVS Caremark Corp. is available at One CVS Drive, Woonsocket, RI 02895; (401) 770-4050;





      Price Range

P/E Ratio

Mar '09 $0.51 vs. $0.51 + 10% $30.47 -


13 - 10
Dec '08 0.70 vs. 0.55 + 10% 38.74 - 23.19 17 - 10
Sep '08 0.60 vs. 0.45 + 2% 44.29 - 35.39 21 - 17
Jun '08 0.60 vs.


+ 2% 43.75 - 37.40 22 - 19



52-Week Price Range

P/E Ratio

2008 $87.47 $2.44 $0.26 $44.29
$23.19 18 - 10
2007 $76.33 $1.92 $0.23 42.60
30.45 22 - 16
2006 $43.81 $1.57 $0.16 36.14
26.06 23 - 17
2005 $37.01 $1.38 $0.15 31.60
22.02 23 - 16
————————————————— Quadrix Scores † —————————————————
Overall Momen-
Value Quality Financial
91 91 67 80 63 84 67

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

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