Stocks for newborns: CVS just what the doc ordered

Inside Wall Street looks at how the largest US drugstore chain is a smart investment for a baby's future.

By Gene Marcial May 2, 2012 12:53PM
Credit: © Steven Senne/AP
Caption: A CVS drugstore, in Coventry, R.I. One in a special Top Stocks series on buying stocks for newborns.
 
CVS Caremark (CVS) isn't just for the sick anymore. As the largest drugstore company and pharmacy benefits manager, it has become a provider of necessary products and services for practically everyone -- sick or not.
 
From the moment a child is born to the time he or she retires, CVS is the go-to store for medical supplies and even services. So CVS is a good stock to start investing and stay with.

Almost everyone knows CVS for its ubiquitous drugstores, totaling 7,300 in 41 states and Puerto Rico and the District of Columbia. Here's how comprehensive its products and services are: Its stores offer prescription drugs and over-the-counter drugs and a wide assortment of general merchandise, including beauty products, photo services, greeting cards and convenience foods.

The drug prescriptions it fills -- a total of 650 million in 2011 -- account for about 20% of the U.S. pharmacy market. The pharmacy operations at CVS are thriving, contributing 68% of retail store sales last year. And non-medical items, such as over-the-counter and personal-care products, generated some 11% of its retail sales.
 
The other part of CVS's operations, pharmacy benefits management, is also a huge sales generator, accounting for $49.7 billion -- or 50% -- of total company sales in 2011. This division provides a full range of services, including operation of mail-order pharmacies, Medicare Part D services, formulary management and discounted drug-purchase agreements.
 
Another important service that CVS provides is its 657 health clinics, the largest network of which operates in 25 states under the MinuteClinic name. The clinics diagnose and treat minor health ailments and perform health screenings, monitor chronic conditions and deliver vaccinations.
 
S&P Capital IQ rates CVS stock, which closed Tuesday at $44.71 a share, as a "strong buy" with a 12-month price target of $54. "CVS is well positioned to benefit from pharmacy benefit management share gains," says S&P analyst Joseph Agnese, "as favorable demographics result in increased customer drug utilization and as a significant increase in generic drug offerings that we expect beginning in mid-2012 leads to (profit) margin expansion."
 
CVS shares are also a good buy as they're undervalued. "We believe CVS is undervalued on an enterprise value/EBITDA [earnings before interest, taxes, depreciation and amortization basis] when compared to its peers," says the analyst. His 12-month price target of $54 reflects an enterprise value/EBITDA multiple of 8.5 times, a 10% discount to the average of its closest rival, and a 2012 EBITDA estimate of $9.2 billion.
 
The company's business fundamentals are equally sound: Agnese expects total sales in 2012 to rise 12.9%, to $121.3 billion, from $107.5 billion in 2011. The analyst forecasts profits to rise 19% in 2012, to $3.32 a share, from 2011 operating earnings of $2.80.
 
"This stock is a standout for the longer term, too," says Andre J, Costanza, analyst at investment research firm Value Line, which rates the stock as No. 2 in its "timeliness" ranking system. Although the stock has run up 20% since December 2011, CVS shares still hold above-average appreciation potential over the next three to five years, says Costanza. He notes that the stock is ranked "No. 1 for safety and scores very favorable marks for other performance indicators."
 
"We think that investors will be hard-pressed to find a better investment on a risk-adjusted basis," says the analyst.
 
I agree with that. I would describe CVS as a starter stock for any investor -- with a long-term upside value and growth potential. (For purposes of disclosure, I own the stock in my IRA account).          

More from the series

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