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Earnings Analysis: CVS Caremark

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CVS Caremark (NYSE: CVS) reports preliminary financial results for the quarter ended 2012-09-30.

CVS Caremark Corp. recently reported its preliminary financial results based on which we provide a unique peer-based analysis of the company. Our analysis is based on the company's performance over the last twelve months (unless stated otherwise). For a more detailed analysis of this company (and over 40,000 other global equities) please visit www.capitalcube.com.

CVS Caremark Corp.'s analysis versus peers uses the following peer-set: Walgreen Co. (WAG), Shoppers Drug Mart Corp. (SC), Sundrug Co. Ltd. (9989), Rite Aid Corp. (RAD), BioScrip Inc. (BIOS), PharMerica Corp. (PMC) and PetMed Express Inc. (PETS). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Quarterly (USD million) 2012-09-30 2012-06-30 2012-03-31 2011-12-31 2011-09-30
Revenues 30,227.0 30,714.0 30,798.0 28,317.0 26,674.0
Revenue Growth % (1.6) (0.3) 8.8 6.2 0.2
Net Income 1,011.0 967.0 777.0 1,100.0 868.0
Net Income Growth % 4.6 24.5 (29.4) 26.7 6.2
Net Margin % 3.3 3.1 2.5 3.9 3.3
ROE % (Annualized) 10.8 10.2 8.2 11.6 9.2
ROA % (Annualized) 6.2 5.9 4.8 6.8 5.3

Valuation Drivers

CVS Caremark Corp.'s current Price/Book of 1.6 is about median in its peer group. The market expects CVS-US to grow at about the same rate as its chosen peers (PE of 15.4 compared to peer median of 14.5) and to maintain the peer median return (ROE of 10.4%) it currently generates.

The company employs relatively high amounts of assets (with a turnover of 1.8x compared to peer median of 2.4x) while generating profit margins of 3.2% that are only about median among its chosen peers. CVS-US's net margin is its lowest relative to the last five years and compares to a high of 3.8% in 2008.

Economic Moat

The company has achieved better revenues growth than its chosen peers (year-on-year change in revenues of 11.1%) but its earnings growth performance has been below the median (change in annual reported earnings of 1.5% compared to the peer median of 18.8%). This suggests that, compared to its peers, the company is focused more on top-line revenues. CVS-US is currently converting every 1% of change in revenue into 0.1% change in annual reported earnings.

CVS-US's return on assets currently is around peer median (5.9% vs. peer median 6.5%) -- similar to its returns over the past five years (6.0% vs. peer median 7.4%). This performance suggests that the company has no specific competitive advantages relative to its peers.

The company's comparatively low gross margins of 19.2% versus peer median of 26.4% suggests that it has a non-differentiated strategy or is in a pricing constrained position. However, CVS-US's pre-tax margin of 5.3% is around the peer median which, when combined with the gross margin, suggests lower operating costs relative to peers.

Growth & Investment Strategy

While CVS-US's revenues have grown faster than the peer median (7.0% vs. 3.9% respectively for the past three years), the market gives the stock an about peer median PE ratio of 15.4. This suggests that the market has some questions about the company's long-term strategy.

CVS-US's annualized rate of change in capital of 1.2% over the past three years is less than its peer median of 4.8%. This investment has generated a peer median return on capital of 7.5% averaged over the same three years. The median return on capital investment on a relatively lower investment suggests that the company is under investing.

Earnings Quality

CVS-US's reported net income margin for the last twelve months is around the peer median (3.2% vs. peer median of 3.1%). However, the company has also recorded a relatively low level of accruals (1.6% vs. peer median of 2.1%) which suggests possible overstatement of its reported net income.

CVS-US's accruals over the last twelve months are around zero. However, this modestly positive level is also less than the peer median which suggests some amount of building of reserves.

Trend Charts

Graph of Revenues Trend for CVS Caremark Corp. (NYSE: <a class=CVS)" class="alignnone size-medium wp-image-4059" data-mce-src="http://www.capitalcube.com/wp-content/uploads/2012/11/f8f1b360e65c8f02fa1da30c87ed5ccd-300x248.png" height="248" src="http://www.capitalcube.com/wp-content/uploads/2012/11/f8f1b360e65c8f02fa1da30c87ed5ccd-300x248.png" title="Revenues Trend Quarterly" width="300" />
Graph of Revenues Trend for CVS Caremark Corp. (NYSE: <a class=CVS)" class="alignnone size-medium wp-image-4062" data-mce-src="http://www.capitalcube.com/wp-content/uploads/2012/11/02172ccac54ffc2a74b5f73020a1d2f5-300x248.png" height="248" src="http://www.capitalcube.com/wp-content/uploads/2012/11/02172ccac54ffc2a74b5f73020a1d2f5-300x248.png" title="Revenues Trend Annual" width="300" />
Graph of Net Margin Trend for CVS Caremark Corp. (NYSE: <a class=CVS)" class="alignnone size-medium wp-image-4060" data-mce-src="http://www.capitalcube.com/wp-content/uploads/2012/11/f2e5f4a3753d6854ae95f294a4121158-300x248.png" height="248" src="http://www.capitalcube.com/wp-content/uploads/2012/11/f2e5f4a3753d6854ae95f294a4121158-300x248.png" title="Net Margin Trend Quarterly" width="300" />
Graph of Net Margin Trend for CVS Caremark Corp. (NYSE: <a class=CVS)" class="alignnone size-medium wp-image-4058" data-mce-src="http://www.capitalcube.com/wp-content/uploads/2012/11/f4997b62ad2a3eee404da314b39a841b-300x248.png" height="248" src="http://www.capitalcube.com/wp-content/uploads/2012/11/f4997b62ad2a3eee404da314b39a841b-300x248.png" title="Net Margin Trend Annual" width="300" />
Graph of Accruals Trend (% revenues, Quarterly) for CVS Caremark Corp. (NYSE: <a class=CVS)" class="alignnone size-medium wp-image-4061" data-mce-src="http://www.capitalcube.com/wp-content/uploads/2012/11/065728159bd118e01525989e2a014f2e-300x248.png" height="248" src="http://www.capitalcube.com/wp-content/uploads/2012/11/065728159bd118e01525989e2a014f2e-300x248.png" title="Accruals Trend Quarterly" width="300" />
Graph of Accruals Trend (% revenues, Annual or TTM) for CVS Caremark Corp. (NYSE: <a class=CVS)" class="alignnone size-medium wp-image-4063" data-mce-src="http://www.capitalcube.com/wp-content/uploads/2012/11/3eddc79fc31b35852320fbfbdbdb6294-300x248.png" height="248" src="http://www.capitalcube.com/wp-content/uploads/2012/11/3eddc79fc31b35852320fbfbdbdb6294-300x248.png" title="Accruals Trend Annual" width="300" />

Company Profile

CVS Caremark Corp. is a pharmacy health care provider in the U.S. with integrated offerings across the entire spectrum of pharmacy care. The company operates in the following segments: Pharmacy Services, Retail Pharmacy and Corporate. The Pharmacy Services segment provides a full range of pharmacy benefit management services to its clients consisting primarily of employers, insurance companies, unions, government employee groups, managed care organizations and other sponsors of health benefit plans and individuals throughout the U.S. This segment also provides drug benefits to eligible beneficiaries under the Federal Government's Medicare Part D program. The Pharmacy Services segment's business operates under the CVS Caremark Pharmacy Services, Caremark, CVS Caremark, CarePlus CVS/pharmacy, CarePlus, RxAmerica and Accordant names. The Retail Pharmacy segment includes retail drugstores, its online retail pharmacy website, CVS.com, onsite pharmacy stores and its retail health care clinics. Its retail drugstores are located in various states, including Puerto Rico and the District of Columbia operating primarily under the CVS/pharmacy name. The CVS/pharmacy stores sell prescription drugs and a wide assortment of nationally advertised brand name and private label merchandise. The Front store categories include over-the-counter drugs, beauty products and cosmetics, film and photo finishing services, seasonal merchandise, greeting cards and convenience foods. The Corporate segment provides management and administrative services to support the overall operations of the company. CVS Caremark was founded in 1963 and is headquartered in Woonsocket, RI.

Disclaimer

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