Why We Like CVS Caremark

Apr. 8.13 | About: CVS Health (CVS)

With 7,525 retail pharmacies CVS Caremark (NYSE:CVS) is one of the largest providers of pharmacy healthcare in the United States. CVS operates three primary business units, retail pharmacy, pharmacy benefit management and retail health clinics.

CVS operates one of the largest chains of retail pharmacies in the United States with sales that comprise about 20% of the total retail pharmacy sales in the United States. Stores are focused primarily on the sale of pharmacy products with about 68% of revenues coming from prescription drugs. Over-the-counter drugs and personal care products along with a wide array of merchandise such as, convenience foods, greeting cards, beauty products, and seasonal items make up the balance of revenues for CVS's retail stores. About 98% of prescription drug sales are paid by third-party managed care providers through prescription drug plans.

CVS's pharmacy management services provide services such as discounted drug purchase agreements, formulary management, Medicare part D administration, specialty pharmacy, and mail-order pharmacy services. The pharmacy management business generates about half of CVS's total revenues. CVS operates 12 mail-order pharmacies and 31 retail specialty pharmacies.

The retail healthcare segment consists of 657 retail healthcare clinics making CVS the operator of the largest chain of retail healthcare clinics in the United States. These clinics, operating under the "MinuteClinic" name, offer services such as, vaccinations, monitoring of chronic health conditions, health screenings, and the diagnosis/treatment of minor health problems. Over the next five years, CVS plans to open about 500 new MinuteClinics at the rate of about 100 new clinics per year.

We have liked CVS for some time and we feel CVS is an excellent value at the current price. Some reasons we like CVS are that it will benefit from an aging U.S. population, an increase in the number of insured people in the U.S. due to Obama Care (Patient Protection and Affordable Care Act), and an increase in generic drug sales. Analysts believe that CVS will earn $3.96/share in 2013 and $4.42/share in 2014.

We believe that CVS is a good buy for the following reasons:

  1. CVS is selling at a cheap forward earnings multiple of 12.6 times 2013 projected consensus earnings.
  2. CVS has a solid balance sheet with $1.38 billion in cash and a low debt burden of just 14.4% of total capitalization.
  3. CVS has a 1.60% dividend yield and a history of consistent dividend increases with a 38.0% increase in the dividend early this year.
  4. S&P has a Strong Buy rating on the stock (5 out of 5 stars) and a 12-month price target of $62.00 per share which is significantly above today's price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: Ulfberht Capital is not an investment advisor. This article is not a recommendation to buy or sell securities. Always consult your investment advisor before making any investment decision.