Will CVS Continue to Skyrocket?

With shares of CVS Caremark Corporation (NYSE:CVS) trading at around $56.44, is CVS an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

CVS is the largest pharmacy healthcare provider in the United States, and one of the country’s largest pharmacy benefit managers. CVS has a goal of reinventing pharmacy by keeping prescription costs down. The company’s timing couldn’t be any better. Here are some positive factors to consider for CVS:

  • Fills more than one billion prescriptions per year (that’s with a “b”)
  • Largest employer of pharmacists and nurse practitioners
  • History of meeting or exceeding expectations
  • Consistent revenue and EPS growth
  • Strong cash flow
  • A 1.60 percent yield
  • Strong guidance
  • Improved balance sheet
  • Favorable industry trends
  • Accelerated share repurchase program worth $4 billion
  • Rise in generics
  • Network of more than 64,000 pharmacies
  • Founded in 1892 (sustainability)

Bullet lists are common, but this goes well beyond the traditional six-shooter. It’s difficult to find a company in any industry that has so much going for it, especially in the current economic environment. There are many different definitions for a blue-chip stock, but regardless of one’s parameters, a strong case could be made for CVS.

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The chart below compares fundamentals for CVS, Walgreen Co. (NYSE:WAG), and Rite Aid Corporation (NYSE:RAD). CVS has a market cap of $68.89 billion, Walgreen has a market cap of $44.73 billion, and Rite Aid has a market cap of $1.56 billion. To be blunt, Rite Aid is for speculators. The focus for these articles is to find financially sound companies that pay dividends and are likely to grow in the future. Therefore, this comparison chart is more for CVS vs. Walgreen. Rite Aid has been included to show the difference in quality between CVS/Walgreen and Rite Aid.  Rite Aid might have the most potential for improvement, but that’s a dangerous game to play. Slow and steady returns will always win out in the end.

CVS

WAG

RAD

Trailing   P/E

18.50

20.99

N/A

Forward   P/E

12.69

12.79

58.33

Profit   Margin

3.15%

2.91%

-0.64%

ROE

10.25%

12.19%

N/A

Operating   Cash Flow

$6.67 Billion

$4.41 Billion

 $609.73 Million

Dividend   Yield

1.60%

2.30%

N/A

Short   Position

N/A

1.80%

6.70%

 

CVS and Walgreen are similar in the fundamentals department. Let’s take a look at some more important numbers prior to forming an opinion on CVS…

E = Equity to Debt Ratio Is Strong  

The debt-to-equity ratio for CVS is stronger than the industry average of 0.40.

Debt-To-Equity

Cash

Long-Term Debt

CVS

0.26

$1.38 Billion

$9.83 Billion

WAG

0.34

$2.44 Billion

$6.36 Billion

RAD

N/A

$263.64 Million

$6.15 Billion

 

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T = Technicals Are Strong

The industry has been on fire year-to-date, and it’s most likely still in the early innings. This is one of the few industries that has the potential to continue to grow even if the market falls. The key word there is “potential”. This is not a guarantee.

1 Month

Year-To-Date

1 Year

3 Year

CVS

7.88%

17.16%

28.30%

61.09%

WAG

17.25%

29.60%

49.42%

38.94%

RAD

9.09%

32.35%

4.05%

33.33%

 

At $56.44, CVS is trading above all its averages.

50-Day   SMA

52.61

100-Day   SMA

50.41

200-Day   SMA

48.41

 

E = Earnings Have Been Improving           

Revenue and earnings have both shown steady growth over the past two years. There is also good potential for continued growth.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

87.47

98.22

95.78

107.10

123.13

Diluted   EPS ($)

2.18

2.55

2.49

2.57

3.03

 

When we look at the last quarter on a year-over-year basis, we see improvements in revenue and earnings.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

28.32

30.80

30.71

30.23

31.39

Diluted   EPS ($)

0.80

0.59

0.75

0.79

0.90

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Support the Industry

Healthcare reform and a weak consumer will actually help this industry. There will be increased interest in generics, and more people will begin to use their local pharmacy as a cheaper alternative to seeing a doctor.

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Conclusion

In such an unpredictable economic environment, it’s refreshing to see a company that has so much going for it. Once again, nothing is guaranteed, but the odds of CVS moving up into blue-chip territory have increased. Needless to say, CVS is an OUTPERFORM.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.