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CVS Caremark owned by gurus Chris Davis, John Keely

November 06, 2009 | About:
Mike Covello

Mike Covello

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CVS Caremark owned by gurus Chris Davis, John Keeley, Andreas Halvorsen, and NWQ managers reported third quarter eanings yesterday. Follwing are some of the highlights:

EPS of $.71 vs year ago $.50 up 22%

Expected full year EPS of $2.61-$2.66 up 15%

Total revenue of $24.631 billion vs year ago $20.863 billion up 18%

Same store sales up 5.7% vs year ago

Boosts share buyback to $2 billion through 2011

Book Value per share of $24.70

CVS is the largest retail pharmacy and the largest provider of prescriptions in the United States, filling or managing over one billion prescriptions annually. There are over 7000 CVS and wholly owned Long's drug stores in the United States. Caremark, acquired in 2007, is one of the largest pharmaceutical benefits managers in the country. Its main competitors are Medco Health and Express Scripts. Acoording to yesterday's 10Q, pharmacetical benefits services comprises 50% of overall sales and 40% of operationg profit.

In yesterday's conference call, CVS chairman Tom Ryan said CVS wil not meet its 2010 expectations. The reason being Caremark's profits could drop as much as 10-12% in 2010 due to some large contract losses, including Chrysler, BCBS of NJ, and the State of Ohio. In what can only be called a gross overreaction, CVS stock dropped 21% yesterday to below $29, resulting in an $8.4 billion loss of market capitalization.

If we put this into proper perspective, the market's pessimism can be translated into profits for contrarian investors. If the retail pharmacy division can increase its profits next year by 10%, which is well below its 5 year average of 17%, CVS should still be able to grow its earnings slightly to $2.80 in 2010. At a recent $29, CVS is trading at just over 10 times earnings well below its 5 year average of 18. This is an excellent opportunity to own a quality property at a discount price.

Disclosure: Author has a small position in CVS


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