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For investors looking to benefit from the healthcare reform law, CVS Caremark (NYSE:CVS) is an attractive pick. The Street currently rates the company a “strong buy” and, in my view, it is one of the most attractive defensive plays on the market currently. With Walgreen (NYSE:WAG) struggling over the dispute with Express Scripts (NASDAQ:ESRX), CVS stands to gain considerable market share.

From a multiples perspective, Walgreen is the cheaper of the two companies. It trades at a respective 11.5x and 10.8x past and forward earnings, while its competitor trades at a respective 15x and 11.7x past and forward earnings. At the same time, Walgreen also offers a dividend yield that is roughly 140 basis points higher at 2.7%. The pharmacy also has gross margins that are around 740 basis points higher. Even still, given concerns over fundamentals and top-line growth, the company is currently only rated a “hold” on the Street.

At the fourth quarter earnings call, Walgreen’s CEO, Greg Wasson, noted strong performance:

Starting with our results today, we had a solid quarter and a strong year as we made substantial progress on our transformation strategy. You saw in our release this morning, we reported record fourth quarter sales of $18 billion, up 6.5% from $16.9 billion a year ago. Excluding the after-tax gain from the sale of WHI, our pharmacy benefit manager, which closed in June, fourth quarter EBIT increased to $832 million. Fourth quarter net earnings were $519 million, and fourth quarter earnings per diluted share increased to $0.57.

Our earnings this quarter marked the fifth consecutive quarter of double-digit growth in earnings per share. On a GAAP basis, which included a $434 million of pretax, $273 million after-tax gain or $0.30 per diluted share from the sale of WHI, fourth quarter EBIT was $1.3 billion. Fourth quarter net earnings were $792 million, and fourth quarter earnings per diluted share were $0.87.

In regards to the healthcare reform law, I believe that CVS is best positioned to benefit. Its strategic decision to acquire UAM’s Part D business added 1.9M lives to PDP. The firm views Medicare Part D, ultimately, as one of its main long-term catalysts, and I agree.

The company will increasingly target the 65+ age group, which is growing rapidly and bound to fuel incoming cash flow. This demographic also is seeing greater utilization rates for prescriptions and the healthcare law will drive enrollees. Furthermore, the PBM business is very strong and contributes to greater confidence in returns. Thankfully, management is also committed to returning free cash flow to shareholders and is likely to accelerate share repurchases going forward.

Consensus estimates for CVS’ EPS are that it will grow by 4.1% to $2.80 in 2011 and then by 14.6% and 11.8% in the following two years. Assuming a multiple of 15x and a conservative EPS estimate of $3.15, the rough intrinsic value of the stock is $47.25. This implies 25.3% upside. Even if the multiple declines to 12.5x and 2012 EPS turns out to be 9.7% below consensus at $2.90, the rough intrinsic value of the stock is $36.25. If the past is any indication of the future, CVS is in a good position as all 19 of the revisions to estimates went up.

Consensus estimates for Walgreen’s EPS are that it will grow by 6.8% to $2.82 in 2012 and then by 10.6% and 11.9% more in the following two years. Assuming a multiple of 14x and a conservative 2013 EPS estimate of $3.06, the rough intrinsic value of the stock is $42.84. This implies 26.8% upside. However, if the multiple falls slightly to 11x and 2013 EPS turns out to be 7.4% below consensus at $2.89, the rough intrinsic value of the stock is $31.79.

Source: CVS Is More Undervalued Than Walgreen