School Stock Report

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CVS Caremark Corp
Summary This Company is the largest pharmacy health care provider in the US
Sector Consumer Staples
Industry Retail
Sub-Industry Drug Retail

Investment Thesis
CVS is well positioned in its industry to gain market share and grow earnings in a positive direction. The company will continue to build strong front end and pharmacy sales, fueled by a larger ageing population and an increase in genetic drugs offerings that lead to wider margins. The company will be able to gain customers from Walgreens (WAG) as a result of a contract dispute WAG has with a major pharmacy benefit manager. CVS’s Pharmacy Benefit Management (PBM) division will continue its strong selling throughout 2013 supporting both sales and earnings. CVS’s current position in its competitive environment should continue to drive earnings growth. Its P/E ration should increase in the following year based on an increase in growth and opportunities. CVS is a strong buy based on current fundamentals and future growth potential.

Corporate Overview
CVS Caremark is the largest pharmacy healthcare provider in the United States, based on revenue, income, and store count. The Company operates in three business segments: Pharmacy Services, Retail Pharmacy and Corporate. Its corporate segment provides management and administrative services to support the overall operations of the Company. Drug stores offer prescription drugs and a wide assortment of general merchandise, including over the counter drugs, beauty products and cosmetics, film and photo finishing services, seasonal merchandise, greeting cards and convenience foods. CVS’s Pharmacy benefit management offering includes mail order pharmacy service, specialty pharmacy services, plan design and administration, formulary management and claims processing.

Financial Summary
CVS overall has consistently grown sales over the past 5 years, averaging at just over 9% annually. This includes a 2.35% decrease in sales in 2010, the company’s worst year in the past decade. During this time period CVS’s gross income grew between 11-14% until 2010, where gross income dropped (1%) from the previous year and net income dropped (7.17%). The company recovered from the down 2010 with a minimal growth in gross income of 1.09% and net income of 1.45% in 2012. Between 1996 and 2004 the company’s compounded annual growth rate (CAGR) was 15%, reflecting strong sales growth and narrow margins. Total sales grew 24% over the last 8 years, reflecting an 18% CAGR in store count and higher same store-store sales.
Sales and margins in 2009 and 2010 were pressured by a weak economy, a less favorable impact from new drug introductions, and a loss of market share within the pharmacy services segment. Sales rose 12% in 2011 reflecting regaining of lost market share. Margins dropped in 2011 due to a change in product mix towards lower margin pharmacy sales and increased drug reimbursement pressure, despite higher sales of wider-margin generic drugs.
However, due to a new pharmacy service segment business and a significant number of branded drugs expected to lose patent protection in 2012, sales and margin trends will be favorable in 2013.

Management
The corporation went through high level management changes in 2011 with the departure of its Chairman and CEO. CVS is currently led by its relatively new President and CEO Larry Merlo, who assumed the position in March 2011. Merlo was previously the Chief Operating Officer of CVS and has been with the company since 1998 in numerous executive positions. David Dorman serves as the Non-Executive Chairman of the Board of CVS Caremark since 2011 and a member of the board since 2006. In addition to CVS, Dorman is a member of the board of YUM! Brands. He is the former Chairman, President, and CEO of AT&T and former Chairman of Motorola solutions. Dorman’s previous experiences make him well suited as the Chairman of CVS.

Recent Quarter Results: 3Q 2012
CVS performed well in its most recent quarter increasing revenue by 13.3% to a record $30.2 billion, led by pharmacy services up 22.2% and retail pharmacy up 5.5%. Retail pharmacy same store sales increased by 4.3% supporting their modest retail pharmacy sales. Adjusted EPS increased 21.4% to $0.85. YTD free cash flow is currently at $4.1 billion. More importantly is CVS’s guidance for the remainder of 2012 which was raised and narrowed to $3.38 to $3.41 up from $3.32 to $3.38. CEO Larry Merlo stated he was very pleased with beating guidance last quarter and the company looks to continue growth and gain market share.

Valuation
CVS is currently valued at $51.30 a share or 17.1x current earnings. Based on management’s FY 2012 EPS guidance in the range of $3.38 to $3.41, CVS current is trading at around 15x FY2012 earnings guidance. Guidance for 2013 is in the range of $3.84 to $3.96, implying earnings growth of approximately 15%, and reflecting a share price in the vicinity of $60 using the current multiple.
Regardless of where the market stands on CVS, getting a company that can grow earnings by 15% and maintain strong and steady margins is a bargain at 15-17x earnings and was a steal at its pull backs in mid-November and again in late December as the fiscal cliff loomed over the financial markets.

Risk
Risk affecting CVS’s market valuation includes the possibility of losing market share to competitors. Wal-Mart poses large risks to market share if it becomes more aggressive in the pharmacy business, and additional competition in the PBM industry threatening Caremark’s business. Also, greater than expected decline in drug reimbursement from federal and state governments contract margins and decrease earnings. Any of these factors listed could be a threat to CVS reaching its intrinsic value.

Career Advancement Opportunities

March 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. (++) 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

March 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

March 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

March 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (86) $261
  • 3rd+ Year Analyst (13) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (202) $159
  • Intern/Summer Analyst (144) $101
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