Drugstore operator CVS Caremark (NYSE:CVS) announced third quarter earnings growth of 7% over the 2010 quarter. In addition, the company forecasted a more favorable 2011 driven by growth in the number of pharmacy claims the company processed. A solid quarter and a forecast for an even better year, should be the beginning of a quality growth cycle for CVS.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Future Growth Ahead
CVS reported a net income of $868 million, or 65 cents a share, compared with a net income of $809 million, or 59 cents a share, in the year ago 2010 period. Analysts were expecting earnings of 67 cents, not accounting for expenses related to acquisitions. Absent those expenses, CVS could be earning 70 cents per share. Profit growth was accompanied by a healthy 12% increase in sales quarter over quarter. CVS benefited from strong growth in its pharmacy benefits business, fueled by the acquisitions of Caremark and the Medicare business from Universal American. Those acquisitions have enabled CVS to directly negotiate lower prescription prices with drug manufacturers. Caremark is expected to add over $8 billion in top line growth in 2011, while the Universal American deal will add over $5 billion in sales in 2012. The company's retail drugstores grew sales by 4% quarter over quarter, while same-store sales, the true measure of retailing health, grew 2.3%, respectively. As the pharmacy business fuels prescription growth, increased store traffic should fuel drugstore growth. (For related reading, see Consumer Spending As A Market Indicator.)

Recession Proof Business
CVS is the second largest drugstore chain operator in the U.S. The largest is rival Walgreen (NYSE:WAG). Together, CVS and WAG operate in a near duopolistic industry. Much smaller rival, Rite-Aid (NYSE:RAD) has been struggling under a pile of debt. CVS currently has over 7,300 locations, while Walgreen's operates over 8,200 locations. Rite-Aid's 4,700 stores would make a decent acquisition, except for the fact that company sits on over $6 billion in debt. Moreover, CVS has been building new locations and taking advantage of cheaper building and construction costs.

With the U.S. population aging, prescription drug demand is expected to grow for years. As CVS continues to benefit from the growth, in its pharmacy benefits business, the company's top and bottom line will likely continue to grow. For 2012, the analysts expect earnings per share of $3.18, but could very likely exceed that guidance. Low prices from Wal-Mart (NYSE:WMT) is not a threat, since CVS can sell generics at the same price. The edge that CVS and Walgreen's have over Wal-Mart is that they have smaller stores, which are often a shorter driving distance than the nearest Wal-Mart. The convenience factor is a valuable one.

The Bottom Line
Trading at about 15 times trailing earnings, CVS has a very reasonable valuation for such a solid business. Prescription drug demand is growing due to a growing aging population. Healthcare is not an economically sensitive product, and will not be drastically affected by any economic setbacks. That gives the company resilience in an uncertain economy. (For related reading, see How To Do Qualitative Analysis On Biotech Companies.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    How Toyota Succeeds at Home and Abroad (TM)

    Japan's biggest car manufacturer is also one of North America's biggest, delighting shareholders with its high profit margins.
  2. Stock Analysis

    Starbucks: Profiting One Cup at a Time (SBUX)

    Starbucks is everywhere. But is it a worthwhile business? Ask the shareholders who've made it one of the world's most successful companies.
  3. Stock Analysis

    How Medtronic Makes Money (MDT)

    Here's the story of an American medical device firm that covers almost every segment in medicine and recently moved to Ireland to pay less in taxes.
  4. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  5. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  6. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  7. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  8. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  9. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  10. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center