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June 01, 2007 at 04:00 AM
As baby boomers age, drug retailers should see rising pharmacy use and growing sales in coming years, analysts say.
John W. Ransom
Raymond James Associates
727-567-2593
Area of Coverage: Retail Drug Stores
Industry Outlook: Overall, we continue to expect a strong 2007 for the drug store chains, as the majority of perceived headwinds that had weighed on shares late last year have proven to be only modest threats against more positive catalysts, such as continued growth in generic drugs, Medicare Part D utilization, relatively stable reimbursement and company-specific efforts to boost front-end profitability.
Furthermore, the drug store chains have typically been perceived as viable defensive investments, and as such, we should expect strong performance from the group even as broader uncertainties over the health of the economy begin to resonate.
Strong Buy: CVS Caremark (CVS)
About CVS Caremark: While our investment outlook is generally positive for the group, we continue to recommend shares of Strong Buy-rated CVS Caremark due to its strong same-store sales growth, potential upside to 2007 earnings estimates driven by the integration of the 701 acquired Albertson’s drug stores, final turnaround at the roughly 1,100 Eckerd stores acquired in August 2004, and, of course, the anticipated synergies from the Caremark merger.
Looking at Albertson’s, management met expectations of $0.10-$0.12 per share dilution from the transaction in 2006 and should experience modest accretion in 2007, aided by strong top-line opportunities, purchasing synergies, shrink improvement, and the rollout of the company’s extensive health and beauty product offerings to the new stores.
Other longer-term catalysts include the investment in Minute Clinics, which are expected to be a $0.05 drag on 2007 EPS, but should encourage customer growth and, we believe, could bring future benefits through the prescription benefit manager, PBM, or specialty offerings. Of course, while there could be some immediate uncertainty at the PBM as Caremark’s major contracts come up for renewal, we believe that the strategic opportunities presented by the combined company will likely encourage growth at Caremark over the next several years. Finally, CVS shares trade at a compelling valuation, at about 16.2 times 2008 EPS, the cheapest in its peer group.
