CVS Caremark: A pharmacy favorite
An aging population and health care reform will boost long-term demand in this sector.
CVS Caremark (CVS) stands out not only as the largest pharmacy chain in the country, but as a well positioned consumer staples stock with a one of a kind structure driving market share growth.
Through the company's more than 7,400 retail stores, CVS provides local health care expertise and convenience to millions of Americans. CVS leverages its retail position through Caremark, its wholly owned pharmacy benefit manager (PBM).
A PBM acts as an intermediary, coordinating prescription drug benefits and prices among pharmaceutical companies, retail pharmacies and individual health care customers.
The Caremark and CVS combination makes filling prescriptions even easier for some of the country's largest prescription drug plans. This vertical integration is allowing the company to expand market share -- up from 16% of the U.S. prescription market when the two companies merged in 2007 to 21% in 2012.
In addition to gaining a bigger slice of the prescription market, CVS is also benefiting from growth in the entire pharmacy industry. The U.S. Census Bureau estimates that the "over 65" population will grow by nearly 80% in the next 20 years.
This is a benefit to the pharmacy sector as people 65 and older fill an average of 25 prescriptions annually, roughly three times the national average.
As well as an aging population, the health care reform act is expected to bring an additional 30 million people onto health insurance beginning in 2014. Prescription drugs are often one of the first medical purchases made by newly insured individuals.
CVS' unique retail and PBM structure drives consistent profitability and growth, neither of which in our view is fully priced into shares. Over the past 10 years revenue per share (RPS) has expanded at an annualized 12.5% per year.
Over the same time, earnings per share (EPS) has compounded at nearly 15% per year, and management expects EPS to grow 12% to 16% again in 2013.
At a current Price to Earnings ratio of 15.1, CVS trades at a discount to its 10-year median of 16.7, and well below the 18.0 to 20.0 valuation norm seen during the 2003 -- 2008 timeframe.
Bottom line, CVS is an opportunity to own a high-quality consumer staples stock with double-digit growth prospects at an attractive valuation.
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