Stock (Symbol) |
CVS Caremark (CVS) |
Stock Price |
$89 |
Sector |
| Food & Necessities |
Data is as of |
| October 3, 2016 |
Expected to Report |
| Nov 8 |
Company Description |
 CVS operates through three business segments: Pharmacy Services, Retail Pharmacy and Corporate. The Pharmacy Services provides a range of pharmacy benefit management (PBM) services and operates under the CVS/caremark Pharmacy Services, Novologix and Navarro Health Services names. The Retail Pharmacy sells prescription drugs and an assortment of general merchandise, including over-the-counter drugs, beauty products and cosmetics, personal care products, convenience foods, photo finishing, seasonal merchandise and greeting cards through the Company’s retail stores, online retail pharmacy Websites and retail healthcare clinics. The Corporate provides management and administrative services to support the overall operations of the Company. The Company, through its wholly owned subsidiary, Omnicare, Inc., provides pharmacy services to long-term care facilities. Source: Thomson Financial |
Sharek’s Take |
 CVS Caremark (CVS) looks like an extremely good value here. During the last year the drug store chain/pharmacy benefit manager has gone from just-over $100 to just-under $90 as profit growth has averaged 12% the last 4 qtrs. The stock’s declined can be blamed on slower than normal profit growth the last 2 qtrs (4% and 8%), competition in the PBM space from UnitedHealth’s OptumRX division, the thought a Clinton election could lead to reduced drug prices and thus fewer profits, and overall weakness in drugstore stocks. Although the stock has been weak, business has been good. Last qtr sales grew 18% on the retail side grew and 21% on the PBM side. Profit growth was just 8% but growth is expected to accelerate to a robust 23% next qtr. CVS has grown profits every year since 2002. Management is savvy and buys back stock in addition to making smart acquisitions. In 2007 CVS acquired Caremark, a pharmacy benefit manager (PBM) that was/is growing 20% a year and in May 2015 acquired Omnicare, a PBM for seniors. One month later it purchased Target’s pharmacy business of 1600 drugstores. The company promotes a healthy lifestyle brand by featuring fresh fruit and other healthy snacks while eliminating cigarettes. This stock has a solid Estimated Long-Term Growth rate of 15% a year, in addition to a yield of 2%, and is cheap at just 15x earnings. I feel CVS is currently undervalued by 18%. My 2017 Fair Value is $118 and if the stock gets there by the end of next year that would be a total return of 35%. CVS is a core holding for conservative investors and growth investors who don’t mind waiting. |
One Year Chart |
 Although this chart doesn’t look hot, the stock had a fantastic five-year run prior to this and individual stocks don’t go up all the time. Last qtr CVS had sales growth of 18% and profit growth of 8%. Management guided profit estimates up a bit and now expects 2016 profit growth of 13% to 14%. Qtrly profit Estimates increased a bit too and now stand at 23%, 17%, 16%, and 15%. |
Fair Value |
 I feel CVS is one of the most undervalued stocks in market. It has delivered solid profit growth every year since 2002, compounded profit growth of 14% a year the last decade, yet still sells for just 15x earnings. My Fair Value is 18x earnings which implies solid upside for the stock. |
Bottom Line |
 CVS has had a great history of growth which continues today. Still, investors are shying away from the stock presently, which has created a great buying opportunity. CVS is safe, has grown profits at a double-digit rate, and pays a decent dividend. I consider this a buy-and-hold stock for conservative investors as well as growth investors who are patient. Profits are expected to accelerate next qtr and that could boost the stock. CVS ranks 22nd of 37 stocks in the Growth Portfolio Power Rankings and 7th of 35 stocks in the Conservative Portfolio Power Rankings. |
Power Rankings |
Growth Stock Portfolio
22 of 37Aggressive Growth Portfolio N/AConservative Stock Portfolio 7 of 35 |
