CVS Caremark Corporation (CVS): What Can Earnings Tell Us?

Warning signs

There are, however, significant risks both to the business and to the stock price. I will mention three of them.

1. 
   Drug pricing: “Too much” deflation in drug pricing will not allow CVS to grow profits at a rapid rate, and could cause them to decline. Its very large (Caremark) pharmacy benefits management business is extraordinarily competitive. Investors may at any time receive an unpleasant surprise out of that division with no warning.
2. 
   
   High dependency: CVS Caremark Corporation (NYSE:CVS) is much more tied into healthcare, rather than general retail, than its major competitors, especially Wal-Mart Stores, Inc. (NYSE:WMT) and Walgreen Company (NYSE:WAG). This makes it more dependent on reimbursement policies of insurers, whether governmental (i.e. Medicare and Medicaid) and private insurers. With Obamacare coming into effect soon, unknown ramifications may ensue.
   
3. 
   
   Balance sheet: CVS has almost no tangible book value – its tangible book is only 2.3% of total assets. That is a direct result of CVS’s buyout spree over the years. The company has issued debt and equity to acquire operating, generally-underperforming pharmacy chains (plus the PBM Caremark). It has eliminated their brand names, taken over their leases and any other assets, and consistently improved their profitability. Because of this strategy and the financial strategy of spending cash to shrink share count, the company has little financial cushion should business turn down.
   

This Fool thinks health-care

I strongly believe that despite the recent run-up in price and despite a higher risk level, CVS shares are still a buy. CVS’s outstanding management has been able to create the ultimate one-stop-shop for health care customers. With Obamacare kicking in and the expanding profit margins of CVS, I believe it’s in a great position to see big profits down the road.

The article Is CVS Caremark Still a Buy? originally appeared on Fool.com is written by Shmulik Karpf.

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