CVS Caremark: A pharmacy favorite

An aging population and health care reform will boost long-term demand in this sector.

By TheStockAdvisors Apr 5, 2013 10:41AM
Pharmacists filling prescriptions copyright UpperCut Images, UpperCut Images, Getty ImagesBy Eric Vermulm, Jim Stack's InvesTech Market Analyst

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.

More from TheStockAdvisors.com

Tags: CVS
1Comment
Apr 8, 2013 8:52AM
avatar
Eric,

You are wrong. Check your facts. CVS is NOT the largest pharmacy chain. With only 7,400 stores it comes in a distant second to Walgreens, which has 8,400 stores.

Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

126
126 rated 1
286
286 rated 2
474
474 rated 3
680
680 rated 4
626
626 rated 5
609
609 rated 6
620
620 rated 7
462
462 rated 8
304
304 rated 9
132
132 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
AAPLAPPLE Inc10
BIDUBAIDU Inc10
BXTHE BLACKSTONE GROUP L.P10
CELGCELGENE CORP10
FOXATWENTY-FIRST CENTURY FOX Inc CLASS A10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.