Sex, Drugs, and Paper Towels

Posted: Published on July 16th, 2012

This post was added by Dr P. Richardson

By Liz Hoffmann - July 16, 2012 | Tickers: CVS, ESRX, WAG | 0 Comments

Liz is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.

What do sex, drugs, and paper towels have in common? They all have devotees who shop at CVS Caremark (NYSE: CVS). Whether it's young men and women for birth control, the sick and elderly for prescription drugs, or growing families for baby supplies and paper towels, you'll find them all at a CVS. And that's just the tip of the iceberg when it comes to the number of products distributed and demographic groups served.

Now for some specifics: CVS has been on a respectable growth trajectory for the past 5 years, with revenues for that period increasing 19.57% and EPS growing at 10.11%. Dividends are paid quarterly and in 2012 have increased 30% versus the year ago perioddriving a 1.35% annualized dividend yield. And for the past 52 weeks, the stock has performed admirably logging a robust 27.44% increase in price. On Thursday, July 5th CVS reached its all-time high of $48.32 per share.

It should be no surprise then that the stock has received an abundance of positive press and is viewed as the number one contender in the drug retail sub-category. Total CVS Caremark revenue of $112.20 B eclipses competitors Walgreens (NYSE: WAG) and Express Scripts (NASDAQ: ESRX) with revenues of $72.53 B and $47.17 B, respectively. I also like to look at net income as a percentage of total revenue and CVS is at 3.17%. It is much stronger than ESRX at a 2.59%, but not as strong as WAG at 3.54%. (As an aside, WAG has spent several billion in it's battle against ESRX over payment issues, which I won't cover in depth here.)

WAG is the favored pick for some but since I like forward PE's when they're conservatively based, CVS has an edge at 12.95 vs. WAG's forward PE of 10.40. Further, WAG has just entered into an agreement to spend $438 million to acquire the 144 stores that now comprise USA Drug. This continues WAG's aggressive growth each year through acquisition, going back to 2010 when they acquired Duane Reade for $1.2 B, and to 2011 when they acquired Drugstore.com. WAG also just made a huge $6.7 B expenditure for a 45% stake in the European drugstore giant Alliance Boots, a deal which has recieved mixed reviews on the street.

I favor organic growth ten to one over acquisition growth. While a marriage through acquisition may look good on paper, you only find out if it's for better or worse once the two companies get together. The merging of disparate cultures, inventory systems, and sales management (to name a few potential issues) is never assessed on a balance sheet (if at all), and could have an immeasurably negative impact. And, as such impact it is not accounted for numerically and/or on any kind of time-horizon, for me it presents a hidden risk. It's an incalculable risk that I would prefer not to have working against my investment. Granted, CVS has made its share of acquisitions, but the most recent dates back to 2008 when they acquired Longs Drugs Stores Corp. for $2.9 billion. Not to be remiss I must also reference the CVS Caremark acquisition (or merger as identified by some), but again, that dates back to March of 2007. Given that it's July of 2012, I believe that any potential problems would have seen the light of day by now.

So, do you want to buy CVS? Personally I believe that it's a good buy and hold. Be forewarned though, that in buying at its 52-week high, there may be some pullback on the horizon. And such pullback could be exacerbated by general market corrections. However if you're in it for the long-term, that shouldnt present a problem. Especially if we look as far as 2014 where we see a robust annualized growth rate of 14.8 percent (based on a projected $4.25 EPS.)

CVS serves the general population and given the unrelenting and ever-increasing interest in sex, drugs, and paper towels that transcends almost all age and socio-economic groups, CVS is in great market position. So it's my belief that you'll most likely benefit from having money invested in that sector when the growing number of consumers shop, shop more often, and shop at CVS. I'm also very thankful that my local CVS is open 24 hours because now that Ive finished writing this post, I still have time to run over there to get the um, err, ah . . . paper towels that I need. That's right, paper towels!

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Sex, Drugs, and Paper Towels

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