CVS knows that a doctor's handwriting is a code for earnings

Posted Feb 16th 2009 11:00AM by Joseph Lazzaro
Filed under: CVS Corp (CVS), Stocks to Buy, Recession

As drug store chains go, there are few better than CVS Caremark, with the chain taking the CVS name. Further, with the U.S. recession in its 15th month and shares doing their best to form a bottom, now is the time to scoop up CVS's shares, for several reasons.

First, CVS (NYSE: CVS) is a classic defensive stock. During recessions, and especially during this recession, consumers cut back spending, but they do their best to maintain essential purchases, and prescriptions are one such purchase. That bodes well for what analysts call "back store revenue" (the pharmacy).

Second, concerning "front store revenue," yes, we know, the retail environment looks challenging, and this should weigh on results in 2009, mitigated somewhat by CVS's continued performance improvement of acquired drugs stores. That fact, combined with company's refined, shrewd expansion strategy -- CVS has been known to place stores in areas knowing full well that the store will lose money, but it will also drive a local and often smaller drug store out of business -- means you're not dealing with amateurs with this chain. So if you're thinking about opening a competitor "Mom & Pop" store next to CVS, think again. The First Call F2009 EPS estimate for CVS is $2.58.

Further, CVS's compound annual growth rate over 10 years of 15% pretty much speaks for itself. The company definitely is not a sentimental play, but if you buy 500 shares and put them in your child's college fund, you'll be glad you did when that first Yale or Penn State tuition bill arrives in 10 years.

Stock Analysis: CVS is a low-risk stock. CVS is an investment, not a trade. Consider buying a 25% position in CVS now; then buy another 25% in three months, if U.S. economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your CVS position in the first half of 2009. Sell/stop loss if you were to buy shares in this company: $18.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

Tags: CVS, CVS Caremark, defensive stocks, drug stores

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Reader Comments (Page 1 of 1)

2-16-2009 @ 11:19AM

MatWith1T said...

Are they still pressing forward with there announced (and in my opinion, unpromising) plan of opening upscale cosmetic chains, Beauty 360?

I like CVS as a defensive investment - but expanding into a luxury retail niche erodes that sentiment.

2-16-2009 @ 7:50PM

Iridium said...

It also helps when CVS gets insurance companies to give them a virtual monopoly on prescriptions. My wife's insurance plan only pays for prescriptions to be filled through CVS caremark. She can get prescriptions filled in other pharmacies but only 2 times a year and at a higher cost. She must also order maintenance medications through the mail. Thats great when an albuterol inhaler runs out.

CVS charges on average 30% more for the same exact drug than Target or Walmart. It is a blatant ripoff.