CVS Caremark (CVS), which competes with Walgreen (WAG), Rite Aid (RAD), and Wal-Mart (WMT), posted fourth-quarter data on Monday. Sales increased 7%, and adjusted earnings per share from continuing operations (excluding, in addition, a penny per share relating to a tax benefit) came in at 78 cents -- good for a growth rate of over 11%. That bottom-line performance matched analyst projections, according to our earnings preview.
As we all know, matching expectations is sometimes the death of a stock. The market has no conscience when it comes to mercilessly punishing an equity for not going beyond the call of the analysts. However, CVS actually did pretty well yesterday, rising 5% by the end of the session; the move was backed by healthy volume.
Same-store sales went up almost 5%. Nice rise, but I'm always fascinated by the challenges pharmacy entities face when it comes to the front-end comps. In this case, CVS recorded a mere 0.3% gain in the metric. There's a big opportunity to expand non-prescription transactions. CVS does have a great loyalty program, but it is tough to compete with other retailers who can beat the chain on price.
According to Reuters, guidance seems to be positive, and the issue with the pharmacy benefits business that dramatically affected the stock back in November has seen an improvement. So, when you look at the big downward spike that occurred on the chart (see six-month period), you come away with the feeling that perhaps the buying observed on Monday was justified since the troubles have already been priced in.
I'm not sure if it's that simple, but I was impressed at the increase in share price. After all, it happened on a down day in the markets. A day in which the Dow fell below the psychologically crucial 10,000 mark.
CVS, to me, is looking attractive on a valuation basis, but I would be careful about trading it. The stock is, however, a viable candidate for a core portfolio. Prescriptions are a solid business, CVS is full of brand equity, and if management can figure out how to truly move those front-end sales, then the shares will prosper over time.
Disclosure: I don't own any company mentioned; positions can change without notice.
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