R.J. Hottovy, CFA, Morningstar
Generally speaking, we believe consumer stock valuations appropriately reflect our turbulent spending outlook. However, pockets of value can still be found across our coverage universe.
In contrast to our cautious outlook for consumer spending, we believe that consumer companies are eager to exploit higher-return opportunities for cash balances after two years of anemic returns and limited organic growth prospects.
Acquisitions should remain a consistent theme, as consumer products firms continue to build out their brand portfolios, increase stakes in joint ventures, or bring overseas licensees in-house. Double-digit dividend increases and sizable share-repurchase programs have also become commonplace among consumer firms, often backed by low-interest debt issuances.
Neil Currie, UBS
CVS Caremark [has] initiated a 5-year EPS growth target of 10-15 percent, including 7-9 percent from continuing operations (before share repurchases). 2011 EPS is likely to be lower than this range due to one-time costs associated with productivity projects, including working capital.
With pharmacy-benefit problems seemingly behind the company, management is focused on improving ROI, including a focus on working capital. CVS expects $33 billion of free cash over the next 5 years, of which two-thirds will be returned to shareholders through a combination of faster dividend growth and an average $3 billion-$4 billion annual share repurchase.
Lisa C. Gill, J.P. Morgan
We maintain our Overweight rating on CVS Caremark. Shares trade at 10.7x our 2011 new adjusted EPS (earnings per share) estimate of $2.91. This represents a 19 percent discount to Walgreens (which we don’t believe is warranted as CVS continues to outperform Walgreens on the retail side of the business) and a 28 percent discount to the average multiple of the standalone PBMs, pharmacy benefit managers. Given the current multiple and the progress the company has made to date (including the new Aetna relationship), we continue to believe the company is not getting sufficient credit for its PBM business.
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