Inside Wall Street: CVS for your 2013 portfolio

The largest US provider of pharmacy services and health care products continues to outperform.

By Gene Marcial Jan 8, 2013 11:00AM
Pills Sean Justice CorbisIf you don't yet own shares of CVS Caremark (CVS), you've missed healthy gains from a steadfast winner. It is arguably a stock for all seasons, meaning it would have, in all likelihood, bounced higher even if the economy had fallen off that much dreaded fiscal cliff. But it isn't too late to catch the winning CVS bandwagon.

For individual investors as well the large institutional investors, it's the relevant stock to buy and hold in 2013, argue some analysts, largely because CVS benefits strongly from the spiraling demand for medicines and other pharmaceutical products. CVS will also continue to gain, say some pros, from the expected expansion of the market for health care products and services because of the impact of the Affordable Care Act, or Obamacare.  

CVS, whose stock has been in an uptrend since early 2003 when it had hit a low of $10.9 a share, bolted to an all-time high of $50.03 a share on Jan. 7, 2013, reflecting the stock's continued strength and vitality against many odds. But although the stock continues to rack up gains and hitting new highs, it hasn't yet peaked, say some analysts who forecast the stock will trade in the $60s sometime this year.

It is a stock suited for both the small individual investors and the large institutions, most of which already own the stock as a core holding, according to the bulls. Why?

CVS has become a brand name as the leading pharmaceutical and health care provider in the U.S. The company  operates a chain of about 7,300 drug stores in 41 states and Puerto Rico, and is at the same time the largest pharmacy benefit manager based on revenue, earnings and store count.

One astounding fact about CVS: its drug stores fill more than one billion prescriptions a year. The stores also offer a wide assortment of general merchandise and over-the-counter drugs, beauty products and cosmetics. Its pharmacy benefit management services is also a standout performer, posting operating income growth of about 20%. It provides a full range of pharmacy benefit management services, such as mail-order prescriptions, Medicare Part D assistance and discounted drug purchase agreements with various employers, and corporations.

"Despite a hiccup in 2010, the company strung together strong earnings results for the better part of the last decade," says Andre J. Costanza, analyst at investment research firm Value Line. The company ranks the stock No. 1 in Safety and scores CVS favorably for all other stability indicators in Value Line's stock ranking system.

"It remains at the forefront of the lucrative pharmacy industry that stands to benefit from the increased need for medicines, as the baby-boom generation matures and lifespan lengthen," says Costanza.

Shareholders, he adds, stand to benefit from the company's strong cash flow and healthy finances. "Double-digit earnings growth at CVS is likely in 2013," says the analyst, who points out that the stock is a "timely" buy due to its recent price momentum.  
 
Analyst Joseph Agnese of S&P Capital IQ, who is also a bull on CVS, sees the stock advancing to $60 in a year. One reason, he says, is "CVS is well positioned to benefit from market share gains, increased customer drug utilization from an aging population, and a significant increase in generic drug offerings that leads to margin expansion."

With the company well positioned to continue taking market share from its closest rivals, including Walgreen (WAG), Express Scripts (ESRX), and Wal-Mart (WMT), shares of CVS, says Agnese, should trade in line with its 12-year historical 14% premium to the price-earnings multiple of the S&P 500. Based on his 2013 earnings estimate of $3.98 a share on projected sales of $124.6 billion, the analyst expects the stock to climb to $60 a share within 12 months. For 2012, Agnese expects earnings of $3.41 a share on sales of $123.1 billion, up from 2011 profits of $2.59 on sales of $107.1 billion.

Agnese rates CVS as a "strong buy."

Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.
1Comment
Jan 9, 2013 1:13PM
avatar
I like the stock, but albeit to high a share price now, and a measly 1.81% dividend. No thanks. Maybe after the debt ceiling debacle slams stocks down, I may buy some.  Usually any stock under a 4% dividend, I shy away from.  Hording almost 60% cash right now, as I think the market is in for a huge drop if the misfits in Washington play their usual games with the "crisis" looming. Lots of pump and dumping going on now.  Better times to buy in a month or two.
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