Can CVS Caremark Keep Growing?

With shares of CVS Caremark (NYSE:CVS) trading around $68, 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:

T = Trends for a Stock’s Movement

CVS Caremark is a pharmacy and healthcare provider in the United States. The company operates in three business segments: Pharmacy Services, Retail Pharmacy, and Corporate. The products and services offered at CVS Caremark stores may be deemed as essential by many consumers in the United States. As CVS Caremark provides an efficient and affordable healthcare and pharmacy experience, look for it to see rising profits.

Less than a week after shocking the country and announcing that it will no longer sell tobacco products, pharmacy giant CVS Caremark CVS reported fourth-quarter profit and revenue growth that came in above what Wall Street was expecting, largely due to an increase in prescription volume. CVS reported $32.8 billion in fourth-quarter revenue, up 4.6 percent over the same quarter in 2012 and edging above Street estimates of $32.7 billion. Fourth-quarter net income increased 12 percent to $1.3 billion, resulting in earnings of $1.05 per share. CVS reported earnings of $1.12 per share, beating the analyst consensus of $1.11 per share and marking a 15.8 percent increase over the same quarter in 2012. On a full-year basis, CVS’ 2013 revenue increased 3 percent to $126.8 billion. Full-year net income increased 19 percent to $4.6 billion, resulting in earnings of $3.75 per share; excluding special items, full-year earnings were $4.00 per share.

“I am very pleased with our fourth-quarter results, which came in at the high end of our expectations and helped produce a record year,” Larry Merlo, CVS president and CEO, said in a statement Tuesday morning. He added that the period was “somewhat atypical,” largely due to fewer Medicare Part D claims that resulted from sanctions placed on CVS by the Centers for Medicare and Medicaid Services in 2013 over the pharmacy’s marketing of the plan.

T = Technicals on the Stock Chart Are Strong

CVS Caremark stock has been displaying a strong trend in recent times. The stock is currently trading near highs for the year and looks set to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, CVS Caremark is trading above its rising key averages which signal neutral to bullish price action in the near-term.

CVS

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of CVS Caremark options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

CVS Caremark options

19.16%

0%

0%

What does this mean? This means that investors or traders are buying a very small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

March Options

Flat

Average

April Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on CVS Caremark’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for CVS Caremark look like and more importantly, how did the markets like these numbers?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

16.67%

30.38%

19.75%

30.51%

Revenue Growth (Y-O-Y)

4.56%

5.76%

1.74%

-0.11%

Earnings Reaction

2.40%*

2.00%

-2.80%

-0.92%

CVS Caremark has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with CVS Caremark’s recent earnings announcements.

* As of this writing

P = Weak Relative Performance Versus Peers and Sector

How has CVS Caremark stock done relative to its peers, Walgreen (NYSE:WAG), Rite Aid (NYSE:RAD), Express Scripts (NASDAQ:ESRX), and sector?

CVS Caremark

Walgreen

Rite Aid

Express Scripts

Sector

Year-to-Date Return

-4.28%

7.71%

12.45%

6.73%

6.65%

CVS Caremark has been a poor relative performer, year-to-date.

Conclusion

CVS Caremark provides healthcare and general products and services to consumers across the nation. The company reported fourth-quarter earnings that beat expectations. The stock has been rising higher and is now trading near highs for the year. Over the last four quarters, earnings and revenue figures have been increasing leaving investors pleased about CVS Caremark’s earnings announcements. Relative to its peers and sector, CVS Caremark has been a poor year-to-date performer. Look for CVS Caremark to OUTPERFORM.

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