In the U.S. and overseas, shoppers are looking for good value, which is good news for a select group of companies.
Neil CurrieUBS203-719 [email protected]
Coverage Area: Drug-Based Retailers
Industry Outlook: Drug store industry sales have improved in February. Rite Aid (RAD) reported a 2.2 percent total increase in comparable store sales, including 2.1 percent from prescriptions (Rx) and 2.5 percent from front-end (merchandise or non-prescription sales), solid considering recent history. On the heels of Walgreen Co.’s (WAG) report of a total comp of 4.2 percent, including 4.1 percent from Rx and 4.6 percent from the front-end, shows that industry-wide sales have improved.
The industry-wide improvement in sales is a good read through to CVS Caremark, who no longer reports monthly comp sales, our top pick in the space. We feel sales with continue to improve into the month of March and reiterate our ratings; CVS Caremark (Buy), WAG (Buy), and RAD (Buy).
About CVS Caremark: The Employees Retirement System (ERS) Board of Trustees announced it has selected CVS Caremark to serve as pharmacy benefit manager (PBM) for the State of Texas under a new four-year contract. The contract will cover 450,000 lives and is estimated to save the state roughly $265 million over the term of the contract. The program costs in pharmacy expenses for FY2007 were $496 million.
The new contract is still subject to final negotiations but would go into effect September 1. Management stated that normally one-third of contracts come up for renewal each year, and of those, one-fourth have been renewed.
Alexia HowardBernstein [email protected]
Area of Coverage: Consumer Packaged Goods
Industry Outlook: Going forward, we believe that the group’s relative and absolute valuation multiples will remain robust, especially if the deteriorating macroeconomic environment persists.
Overall, we continue to recommend an overweight position in U.S. food stocks and a market-weight position in household and personal products stocks.
Within our coverage, we rate Campbell Soup (CPB), Heinz (HNZ), Kellogg (K), Kraft (KFT), Procter & Gamble (PG), and Sara Lee (SLE) as Outperform with price targets of $45, $56, $61, $41, $78, and $20, respectively.