Key Reasons to Invest in CVS Caremark

Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Given the uncertainty of the economic recovery, investing in pharmacies like CVS Caremark (NYSE: CVS), Walgreen (NYSE: WAG), and Rite Aid (NYSE: RAD) offers investors a relatively safe harbor.

The best reason to invest in pharmacies is that the sector is almost recession proof. People will always need medicine when they are sick. Moreover, the prescription drug benefit that was added to Medicare during the Bush Administration was a boon to the retail pharmacy sector. And now that the Affordable Care Act is on the way in 2014, pharmacies will be a top beneficiary in the health care services sector.

Walgreen may be the largest pharmacy retail chain of the three, with a market cap of more than $28.5 billion. And due to its acquisition of more than 250 Duane Reade stores in the tri-state area of New York in April 2010, the outfit now has more than 7,800 brick and mortar locations nationwide. As for Rite Aid, some analysts were predicting its demise back in 2009; but the firm was successful in refinancing its debt and is holding on as the 3rd largest U.S. retail pharmacy.

But CVS' stock has recently been hovering at the $51 per share mark, which is a 52 week high, and the price could make it to $60 in 2013, leaving investors with room to grow this year. This is a price/earnings ratio of about 14 given the 2013 earnings estimates. So the stock appears to be undervalued, since its 10-year average price-earnings ratio is 22.4.

More than just a retail pharmacy, however, the company has made a bold move into the retail sector by providing an array of goods and services. While the core value of the outfit stems from pharmaceutical sales, the foot traffic as customers drop off and pick up their medicine prescriptions leads to dry grocery goods, milk, beer, and wine sales, health, and beauty supplies (a key money-maker and second to the drug side of the business), film and photo services, money grams, and more.

CVS’ other business, the pharmacy benefit management service, has been an engine of income growth, growing 19% this year. This line provides a wide range of services like mail-order prescriptions, Medicare Part D assistance, and discounted drug purchase agreements with various employers and corporations.

In addition, many of the new CVS locations that were built in the last 2-3 years offer customers drive through window service for the medicine customers, which is a big benefit for many seniors – and they are the largest purchasers in this sector.

That being said, the biggest risk facing CVS is competition from Wal-Mart (NYSE: WMT). This is because it also sells prescription drugs in more than 4000 Wal-Mart locations, as well as Sam's Club and Neighborhood Market stores. In particular, the retail behemoth has tapped the vein of 350 generic medications. However, CVS says it will match any offers for generics from its competitors.

In sum, continued growth for CVS will come from demographics, the aging population, and the increasing supply and demand for generics. For 2013, S&P Capital IQ estimates that total CVS sales will increase by 4% to $129 billion, from an estimated $124.1 billion in 2012.

At the end of the day, CVS Caremark’s drug-stores account for about 50% of sales, and the outfit fills more than one billion prescriptions a year. This translates to about 20% of total U.S. retail pharmacy sales. Finally, the company’s strong earnings growth, healthy cash flow, and efforts to focus on shareholder value are reasons to be optimistic about future growth. So now is the time to invest in CVS Caremark.


kcolona has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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