Can CVS Compete With Walgreen in This Different Arena?

With shares of CVS Caremark Corporation (NYSE:CVS) trading at around $58.97, 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

The basic fundamentals and potential catalysts for the stock will be covered, but let’s begin by looking at two other important factors, which are company culture and online popularity. Company culture is important because employees who are happy are likely to produce more. Online popularity is important because the online shopping trend has been strong and is likely to gain increased momentum going forward.

In regards to company culture, CVS isn’t very impressive. On Glassdoor.com, employees give it a 2.8 rating of 5. This is average. What really stands out is that only 37 percent of employees would recommend the company to a friend. And only 44 percent of employees approve of CEO Larry J. Merlo.

Walgreen scores better for company culture, but not by much. Employees give Walgreen a 2.9 rating of 5. Only 46 percent of employees would recommend the company to a friend, but that’s higher than CVS. However, Walgreen scores lower than CVS when it comes to CEO approval. A subpar 41 percent approve of CEO Greg Wasson.

In regards to online popularity (or online traffic), Walgreen is ahead, but CVS is gaining ground. Walgreen has a Global traffic rank of 1307, and a U.S. traffic rank of 255. CVS has a Global traffic rank of 1640, and a U.S. traffic rank of 305. However, Walgreen’s traffic has remained mostly still for the past two years, while traffic for CVS has steadily increased.

Over the past three months for CVS, pageviews-per-user has decreased 4.25 percent, time-on-site has decreased 4 percent, and the bounce rate is unchanged. Over the past three months for Walgreen, pageviews-per-user has decreased 10.63 percent, time-on-site has decreased 11.10 percent, and the bounce rate has increased 6 percent.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Here are some positives and negatives for CVS:

Positives:

  • Revenue and earnings have consistently improved on an annual basis
  • 2.20 percent yield
  • Strong cash flow
  • Quality debt management
  • Five consecutive earnings beats
  • Volume growth in Pharmacy Services
  • Margin expansion
  • Generic wave (higher margins)
  • Increase in cash position
  • Accelerated share repurchase agreement
  • 29.9 percent increase in earnings year-over-year (Q1)

Negatives:

  • 4.7 percent increase in operating expenses year-over-year (Q1)
  • 45.1 percent decline in free cash flow year-over-year (Q1)
  • Weak guidance for FY2013
  • Flat revenue year-over-year (Q1)

Now let’s take a look at some comparative numbers. The chart below compares fundamentals for CVS, Walgreen, and Wal-Mart Stores Inc. (NYSE:WMT). CVS has a market cap of $72.41 billion, Walgreen has a market cap of $46.30 billion, and Wal-Mart has a market cap of $258.33 billion.

CVS

WAG

WMT

Trailing   P/E

19.44

21.73

15.63

Forward   P/E

13.34

13.24

13.34

Profit   Margin

3.15%

2.91%

3.62%

ROE

10.24%

12.19%

22.42%

Operating   Cash Flow

 $6.67 Billion

 $4.41 Billion

 $25.59 Billion

Dividend   Yield

1.60%

2.20%

2.40%

Short   Position

0.90%

1.40%

1.70%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

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

$1.55 Billion

$9.83 Billion

WAG

0.34

$2.44 Billion

$6.36 Billion

WMT

0.66

$7.81 Billion

$54.23 Billion

 

T = Technicals Are Strong  

CVS has performed well over the past three years.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

1 Month

Year-To-Date

1 Year

3 Year

CVS

8.56%

22.97%

33.89%

66.63%

WAG

4.05%

32.92%

44.94%

49.39%

WMT

4.02%

15.74%

36.07%

57.64%

 

At $58.97, CVS is trading above all its averages.

50-Day   SMA

54.78

100-Day   SMA

52.52

200-Day   SMA

49.39

 

E = Earnings Have Been Strong                              

Earnings and revenue have consistently improved on an annual basis.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

87.47

N/A

95.78

107.10

123.13

Diluted   EPS ($)

2.18

N/A

2.49

2.57

3.03

 

When we look at the previous quarter on a year-over-year basis, we see flat revenue and an increase in earnings.

12/2011

3/2012

6/2012

9/2012

12/2013

Revenue   ($)in   billions

30.80

30.71

30.23

31.39

30.80

Diluted   EPS ($)

0.59

0.75

0.79

0.90

0.77

 

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

Baby boomers are retiring in masses, and they’re going to need more medicine as they age. The rise in generics will also improve margins for the industry. On the negative side, consumer weakness might hurt in other areas.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Conclusion

CVS has been a steady performer through the years. It’s also a company that takes care of its shareholders and has a strong history of beating earnings. These trends are likely to remain in place over the long haul. As far as CVS vs. Walgreen, Walgreen has outperformed CVS by a wide margin on an all-time basis. However, in recent years, the stocks have delivered similar performances. Therefore, it’s a wash.

CVS is a long-term 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.

Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.

More from The Cheat Sheet