Top picks from S&P: CVS Caremark

CVS, quick to capitalize on its rival's troubles, also stands to gain from the implementation of health reforms.

By TheStockAdvisors May 24, 2013 4:13PM
Young woman looking at medicine in pharmacy, close-up copyright B2M Productions, Digital Vision, Getty Images(This post is part of a special report featuring 7 Top Picks from S&P Capital IQ.)

By Joseph Agnese, S&P Capital IQ, The Outlook
Sector:  Food & Drug Retailers

CVS Caremark (CVS) operates one of the largest drug store chains and pharmacy benefit managers in the U.S. As of December 2012, the company had stores in 92 of the top-100 U.S. drug store markets and held the largest or second- largest share in 74 of these markets.

It filled more than 718 million prescriptions in 2012, accounting for about 21% of the U.S. retail pharmacy market. Pharmacy operations are critical to CVS's success, in our view, accounting for 69% of retail store sales in 2012.

Sales rose 12% in 2011, reflecting new customer wins and the acquisition of Universal American's (UAM 8.65 NR) Part D business. In 2012, sales rose 15% on retail drug store market share gains due to a contractual conflict between Walgreen (WAG) and pharmacy benefit manager Express Scripts.

Margins widened in 2012 as a number of large branded drugs lost patent protection, which resulted in a significant rise in high margin generic-drug sales. We see margins widening further in 2013.

We believe CVS is well positioned to benefit from the retention of the majority of its recent retail market share gains, increased drug use by an aging population, and increased sales of generic drugs.

Additionally, we expect demand to rise as more consumers get health insurance with the implementation of the Patient Protection and Affordable Care Act that begins in 2014.

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