Is it Time to Care About CVS?

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With Shares of CVS Caremark Corporation (NYSE:CVS) trading at $46.36, is CVS a Buy, a Wait and See, or a Stay Away? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s MovementCVS

CVS posted a third-quarter 2012 report on November 6 that was largely in line with analyst estimates. Earnings per share grew 21.4 percent for the quarter a year ago to $0.85, beating estimates by 1 cent. Revenue grew 13.3 percent year over year to $30.2 billion, missing estimates by $700 million.

The company issued full-year EPS guidance between $3.38 and $3.41, above estimates of $3.37.

CEO Larry Merlo commented, “The retail pharmacy business continued to capitalize on the market disruption resulting from the impasse between two of our competitors, and our retention of the prescriptions we gained during that impasse has been strong since their dispute was resolved in mid-September.”

In the middle of September, with shares pushing against all-time highs, the company approved $6 billion in share repurchases.

In October, the U.S. government opened an investigation into allegations that CVS refilled prescriptions and submitted insurance claims to Medicare without getting approval from patients.

E = Debt to Equity Ratio is Close to ZeroCVS Storefront

CVS’s debt-to-equity ratio of 0.25 edges out competitors Walgreen Co. (NYSE:WAG), which sits at a ratio of 0.30, peer-group member Express Scripts (NASDAQ:ESRX) with a ratio of 0.82.

However, it’s also important to look at total cash and total debt on hand. CVS is sitting on a war chest of $1.23 billion, but is saddled with $10.04 billion in total debt. Walgreen, on the other hand, boasts $1.32 billion in cash, and total debt of only $5.39 billion.

T = Technicals on the Stock Chart are Strong

As of November 6, 2012, the stock price is 0.12 percent above its 20-day simple moving average, or SMA; 0.20 percent above its 50-day SMA, and 4.01 percent above its 200-day SMA.

Since the beginning of 2012, the stock has been in an upward trend, gaining 12.38 percent this year to date, and 22.05 percent year over year.

E = Excellent Relative Performance to Peers

Many investors favor return on equity as a key metric to diagnose how well a company is operating. CVS falls in the middle of the pile with an ROE of 9.75 percent, while Walgreen has an ROE of 12.86 percent, and Express Scripts has an ROE of 8.80 percent.

Operating margins are also critical for stock evaluation. On this metric, CVS out performs its competitors at 5.71 percent, compared to 4.84 percent for Walgreen, and 3.59 percent for Express Scripts.

T = Trends Support the Industry in which the Company OperatesCVS Pharmacy

The pharmacy and health care services industry stands to benefit as baby boomers grow older. The age group 65+ is expected to grow by 65 percent by 2015. President Barack Obama’s affordable care act will put 32 million more people on health insurance, and is expected to produce 40 million new prescriptions being written per year.

As branded drugs fall out of their patents, generic drug manufacturers will pick up production, lowering the cost per dose for medication and saving companies like CVS on their bottom line.

According to Statista, the number of prescriptions dispensed in the U.S. grew by nearly 200 million per year between 2007 and 2011, for a 2011 rate of over 4 billion prescriptions dispensed.

Conclusion

As CEO Larry Merlo pointed out in the company’s third-quarter report, CVS has benefit from a spat between some of its competitors. The impasse between Walgreen and Express Scripts has boosted CVS’s already strong position. The company has seen steady growth over the past few years, and is raising its guidance despite tough economic conditions.

Because of this, and the metrics above, CVS is a Outperform. Not only is the company in a healthy, stable position, but it’s a good value for dividend investors as well.

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