Walgreen [NYSE:WAG] May 15, 2009 $29.50 - 1:10 PM EST
CVS Caremark [NYSE:CVS] May 15, 2009 $30.30 - 1:10 PM EST
WAG and CVS are the top two drugstore operators in America with estimated 2009 sales of about $64 billion and $97 billion respectively. Both fill prescriptions on-site as well as through their mail order facilities. Pharmacy revenues were about 65% and 68% of total sales for WAG and CVS in 2008 [versus front-of-store general merchandise]. 3rd party payments were running around 95% on Rx’s for each company.
FY 2009 (ends Aug. 31, 2009) will likely mark Walgreen’s first down year-over-year comparison in decades. Zacks sees $2.05 versus FY 2008’s all-time record of $2.17. Growth is expected to resume in FY 2010 with projected earnings of 11.7% to $2.29 /share.
Overall, Walgreens has been a model of consistency. Value Line notes their ‘A++’ financial strength and their 90th and 100th percentile rankings for ‘stock price stability’ and ‘earnings predictability’ (with 100th being best).
Value Line assigns WAG their highest rank for safety. Morningstar also favors the shares giving them a 4-star rating (with 5-stars being best) and a present day ‘fair value’ of $38 /share.
Here are the past few years per share numbers as reported by Value Line:
FY …... Sales ….... C/F ….. EPS ….. Div ….. B/V ….. Avg. P/E
2003 … 31.72 …. 1.47 …. 1.12 ….. 0.16 …..7.02 …… 27.7x
2004 … 36.65 …. 1.72 …. 1.32 ….. 0.18 …..8.04 …… 26.3x
2005 … 41.16 …. 1.99 …. 1.52 ….. 0.22 …..8.67 …… 27.9x
2006 … 47.04 …. 2.30 …. 1.72 ….. 0.27 ….10.04 ……26.0x
2007 … 54.24 …. 2.74 …. 2.03 ….. 0.33 ….11.20 ……22.2x
2008 … 59.68 …. 3.03 …. 2.17 ….. 0.40 ….13.01 ……17.1x
At today’s quote of $29.50 and the calendar year estimate of $2.10 the present multiple is
Here’s a 20-month play that works well even if WAG shares barely move up from where they are right now:
Buy 1000 WAG @$29.50 …….....……..$29,500
Sell 10 Jan. 2011 $30 calls @$4.50 …….....….……$4,500
Sell 10 Jan. 2011 $30 puts @$5.20 …………....….$5,200
Net Cash Out-of-Pocket ………….....….$19,800
On expiration date (Jan. 20, 2011) if WAG is > $30:
[Up just 2% from today’s price.]
The $30 calls will be exercised.
You will sell your shares for $30,000.
The $30 puts will expire worthless – a good thing for you as a seller.
You will likely have collected $788 in dividends.
You will have no further option obligations.
Your will hold no shares and $30,788 in cash for your original
outlay of $19,800.
That’s a best-case scenario net profit of $10,988 / $19,800 = 55.5%
which was achieved in just 20 months on shares that only needed to rise by 2% from the trade’s inception price.
What’s the risk?
Should WAG finish below $30 on Jan. 20, 2011:
The $30 calls will expire worthless.
The $30 puts will be exercised.
You will be forced to buy an additional 1000 shares of WAG and to
lay out another $30,000 cash.
You will likely have collected $788 in dividends.
You will have no further option obligations.
You will end up owning 2000 shares of WAG.
What’s the break-even point of the whole trade?
On the first 1000 shares it’s the $29.50 purchase price less the
$4.50 /share call premium = $25.00 /share.
On the ‘put’ shares it’s the $30 strike price less the
$5.20 put premium = $24.80 /share.
Your break-even is the average of $25 + $24.80 = $24.90 /share.
Thus, WAG shares could drop from $29.50 to as low as $24.90 or (-15.5%) without you suffering a loss. If you include the $788 in expected dividends your break-even would be reduced to $24.11 /share.
Walgreen shares had not been lower than $26.90 ever during the entire period from 2000 right through September of 2008. In fact, the absolute lows touched in 2004-2005-2006-2007 were $32.00, $39.70, $39.60 and $35.80 respectively.
With a break-even near nine-year lows I feel pretty comfortable that I won’t be hurt on this trade. Especially with fundamentals expected to be at new record highs by year-end 2010.
In summary: You can own a high-quality, blue chip name with the potential to make over 55% in 20 months. You are protected against loss unless the shares decline by more than 15% from today’s already reasonable price.
_______________________________________________________________________________
CVS Caremark was spun off from Melville in 1996 and has posted stellar results ever since. The merged with Caremark in March 2007. Their purchase of Longs Drug Stores is expected to be accretive by 2010. This year figures to be the 8th straight year of earnings improvement. The dividend has been raised in each of the past six years.
Like Walgreens, CVS is a steady performer. Value Line gives them an ‘A’ for financial strength and 90th and 95th percentile ranking for ‘stock price stability’ and ‘earnings predictability’ respectively. They rank ‘above average’ for safety. Morningstar assigns CVS a 'fair value' of $37 /share.
Here are the per share numbers for CVS as reported by Value Line:
Year ….... Sales ….. C/F ….. EPS …... Div …... B/V ….. Avg. P/E
2003 ….. 33.62 …. 1.49 …..1.03 ….. 0.12 …..7.31 …… 14.1x
2004 ….. 38.15 …. 1.75 …..1.10 ….. 0.14 …..8.43 …… 18.4x
2005 ….. 45.45 …. 2.15 …..1.38 ….. 0.15 …..9.96 …….19.6x
2006 ….. 53.06 …. 2.50 …..1.57 ….. 0.16 ….11.75 ……19.1x
2007 ….. 53.14 …. 2.59 …..1.92 …...0.23 ….21.66 ……19.1x
2008 ….. 60.87 …. 3.38 …..2.44 …...0.26 ….24.06 ……15.2x
With Zacks estimates for 2009 and 2010 now at $2.60 and $2.96 CVS now trades at
Here’s my 20-month play for CVS:
Buy 1000 CVS @$30.30 ………........…. $30,300
Sell 10 Jan. 2011 $30 calls @$5.50 ………...........….$5,500
Sell 10 Jan. 2011 $30 puts @$5.00 ……..........…….$5,000
Net Cash Out-of-Pocket ….......……….. $19,800
If CVS simply remains above $30 on Jan. 20, 2011:
The $30 calls will be exercised.
You will sell your shares for $30,000.
The $30 puts will expire worthless.
You will likely have collected $458 in dividends.
You will have no further option obligations.
You will hold no shares and $30,458 cash for the original $19,800 outlay.
That’s a best-case scenario total profit of $10,658 / $19,800 = 53.8%
on shares that did not have to go up at all from the inception date trade.
What’s the risk?
If CVS closes
The $30 calls will expire worthless.
The $30 puts will be exercised.
You will be forced to buy an additional 1000 shares of CVS and to
lay out another $30,000 cash.
You will likely have collected $458 in dividends.
You will have no further option obligations.
You will end up with 2000 shares of CVS.
What’s the break-even on the whole trade?
On the first 1000 shares it’s the $30.30 purchase price less the
$5.50 /share call premium = $24.80 /share.
On the ‘put’ shares it’s the $30 strike price less the
$5.00 /share put premium = $25.00 /share.
Your break-even is thus $24.90 /share (excluding dividends).
CVS shares could fall as much as $5.40 /share or (-17.8%) before
you would suffer a loss.
The absolute low prices in calendar years 2006 – 2007 – 2008 and 2009 were $26.10, $30.50, $23.19 and $24.00 respectively. With record sales and earnings on tap I see little risk that I’ll be hurt with a $24.90 break-even price.
In summary: This 20-month combination play on high-quality CVS shares offers total returns of almost 54% with decent downside protection of more than 17% from the present quote.
Disclosure: Author is long CVS and WAG shares and short CVS and WAG options.
CVS Caremark [NYSE:CVS] May 15, 2009 $30.30 - 1:10 PM EST
WAG and CVS are the top two drugstore operators in America with estimated 2009 sales of about $64 billion and $97 billion respectively. Both fill prescriptions on-site as well as through their mail order facilities. Pharmacy revenues were about 65% and 68% of total sales for WAG and CVS in 2008 [versus front-of-store general merchandise]. 3rd party payments were running around 95% on Rx’s for each company.
FY 2009 (ends Aug. 31, 2009) will likely mark Walgreen’s first down year-over-year comparison in decades. Zacks sees $2.05 versus FY 2008’s all-time record of $2.17. Growth is expected to resume in FY 2010 with projected earnings of 11.7% to $2.29 /share.
Overall, Walgreens has been a model of consistency. Value Line notes their ‘A++’ financial strength and their 90th and 100th percentile rankings for ‘stock price stability’ and ‘earnings predictability’ (with 100th being best).
Value Line assigns WAG their highest rank for safety. Morningstar also favors the shares giving them a 4-star rating (with 5-stars being best) and a present day ‘fair value’ of $38 /share.
Here are the past few years per share numbers as reported by Value Line:
FY …... Sales ….... C/F ….. EPS ….. Div ….. B/V ….. Avg. P/E
2003 … 31.72 …. 1.47 …. 1.12 ….. 0.16 …..7.02 …… 27.7x
2004 … 36.65 …. 1.72 …. 1.32 ….. 0.18 …..8.04 …… 26.3x
2005 … 41.16 …. 1.99 …. 1.52 ….. 0.22 …..8.67 …… 27.9x
2006 … 47.04 …. 2.30 …. 1.72 ….. 0.27 ….10.04 ……26.0x
2007 … 54.24 …. 2.74 …. 2.03 ….. 0.33 ….11.20 ……22.2x
2008 … 59.68 …. 3.03 …. 2.17 ….. 0.40 ….13.01 ……17.1x
At today’s quote of $29.50 and the calendar year estimate of $2.10 the present multiple is
Here’s a 20-month play that works well even if WAG shares barely move up from where they are right now:
Buy 1000 WAG @$29.50 …….....……..$29,500
Sell 10 Jan. 2011 $30 calls @$4.50 …….....….……$4,500
Sell 10 Jan. 2011 $30 puts @$5.20 …………....….$5,200
Net Cash Out-of-Pocket ………….....….$19,800
On expiration date (Jan. 20, 2011) if WAG is > $30:
[Up just 2% from today’s price.]
The $30 calls will be exercised.
You will sell your shares for $30,000.
The $30 puts will expire worthless – a good thing for you as a seller.
You will likely have collected $788 in dividends.
You will have no further option obligations.
Your will hold no shares and $30,788 in cash for your original
outlay of $19,800.
That’s a best-case scenario net profit of $10,988 / $19,800 = 55.5%
which was achieved in just 20 months on shares that only needed to rise by 2% from the trade’s inception price.
What’s the risk?
Should WAG finish below $30 on Jan. 20, 2011:
The $30 calls will expire worthless.
The $30 puts will be exercised.
You will be forced to buy an additional 1000 shares of WAG and to
lay out another $30,000 cash.
You will likely have collected $788 in dividends.
You will have no further option obligations.
You will end up owning 2000 shares of WAG.
What’s the break-even point of the whole trade?
On the first 1000 shares it’s the $29.50 purchase price less the
$4.50 /share call premium = $25.00 /share.
On the ‘put’ shares it’s the $30 strike price less the
$5.20 put premium = $24.80 /share.
Your break-even is the average of $25 + $24.80 = $24.90 /share.
Thus, WAG shares could drop from $29.50 to as low as $24.90 or (-15.5%) without you suffering a loss. If you include the $788 in expected dividends your break-even would be reduced to $24.11 /share.
Walgreen shares had not been lower than $26.90 ever during the entire period from 2000 right through September of 2008. In fact, the absolute lows touched in 2004-2005-2006-2007 were $32.00, $39.70, $39.60 and $35.80 respectively.
With a break-even near nine-year lows I feel pretty comfortable that I won’t be hurt on this trade. Especially with fundamentals expected to be at new record highs by year-end 2010.
In summary: You can own a high-quality, blue chip name with the potential to make over 55% in 20 months. You are protected against loss unless the shares decline by more than 15% from today’s already reasonable price.
_______________________________________________________________________________
CVS Caremark was spun off from Melville in 1996 and has posted stellar results ever since. The merged with Caremark in March 2007. Their purchase of Longs Drug Stores is expected to be accretive by 2010. This year figures to be the 8th straight year of earnings improvement. The dividend has been raised in each of the past six years.
Like Walgreens, CVS is a steady performer. Value Line gives them an ‘A’ for financial strength and 90th and 95th percentile ranking for ‘stock price stability’ and ‘earnings predictability’ respectively. They rank ‘above average’ for safety. Morningstar assigns CVS a 'fair value' of $37 /share.
Here are the per share numbers for CVS as reported by Value Line:
Year ….... Sales ….. C/F ….. EPS …... Div …... B/V ….. Avg. P/E
2003 ….. 33.62 …. 1.49 …..1.03 ….. 0.12 …..7.31 …… 14.1x
2004 ….. 38.15 …. 1.75 …..1.10 ….. 0.14 …..8.43 …… 18.4x
2005 ….. 45.45 …. 2.15 …..1.38 ….. 0.15 …..9.96 …….19.6x
2006 ….. 53.06 …. 2.50 …..1.57 ….. 0.16 ….11.75 ……19.1x
2007 ….. 53.14 …. 2.59 …..1.92 …...0.23 ….21.66 ……19.1x
2008 ….. 60.87 …. 3.38 …..2.44 …...0.26 ….24.06 ……15.2x
With Zacks estimates for 2009 and 2010 now at $2.60 and $2.96 CVS now trades at
Here’s my 20-month play for CVS:
Buy 1000 CVS @$30.30 ………........…. $30,300
Sell 10 Jan. 2011 $30 calls @$5.50 ………...........….$5,500
Sell 10 Jan. 2011 $30 puts @$5.00 ……..........…….$5,000
Net Cash Out-of-Pocket ….......……….. $19,800
If CVS simply remains above $30 on Jan. 20, 2011:
The $30 calls will be exercised.
You will sell your shares for $30,000.
The $30 puts will expire worthless.
You will likely have collected $458 in dividends.
You will have no further option obligations.
You will hold no shares and $30,458 cash for the original $19,800 outlay.
That’s a best-case scenario total profit of $10,658 / $19,800 = 53.8%
on shares that did not have to go up at all from the inception date trade.
What’s the risk?
If CVS closes
The $30 calls will expire worthless.
The $30 puts will be exercised.
You will be forced to buy an additional 1000 shares of CVS and to
lay out another $30,000 cash.
You will likely have collected $458 in dividends.
You will have no further option obligations.
You will end up with 2000 shares of CVS.
What’s the break-even on the whole trade?
On the first 1000 shares it’s the $30.30 purchase price less the
$5.50 /share call premium = $24.80 /share.
On the ‘put’ shares it’s the $30 strike price less the
$5.00 /share put premium = $25.00 /share.
Your break-even is thus $24.90 /share (excluding dividends).
CVS shares could fall as much as $5.40 /share or (-17.8%) before
you would suffer a loss.
The absolute low prices in calendar years 2006 – 2007 – 2008 and 2009 were $26.10, $30.50, $23.19 and $24.00 respectively. With record sales and earnings on tap I see little risk that I’ll be hurt with a $24.90 break-even price.
In summary: This 20-month combination play on high-quality CVS shares offers total returns of almost 54% with decent downside protection of more than 17% from the present quote.
Disclosure: Author is long CVS and WAG shares and short CVS and WAG options.
