Company ProfileÂ (obtained fromÂ Google Finance):Â CVS Caremark Corporation (CVS Caremark), together with its subsidiaries, is a pharmacy health care provider in the United States. CVS Caremark provides pharmacy services through its pharmacy benefit management (PBM), mail order and specialty pharmacy division, CVS Caremark Pharmacy Services; approximately 7,300 CVS/pharmacy retail stores; retail-based health clinic subsidiary, MinuteClinic, and its online retail pharmacy, CVS.com. The Company operates in three business segments: Pharmacy Services, Retail Pharmacy and Corporate. Its corporate segment provides management and administrative services to support the overall operations of the Company. In April 2012, Health Net, Inc.â€™s subsidiary, Health Net Life Insurance Company, sold its Medicare stand-alone Prescription Drug Plan (Medicare PDP) business to a subsidiary of CVS Caremark. In February 2013, it bought Drogaria Onofre.
Defensive and Enterprising Investor TestsÂ (What is the significance of these tests, and what is PEmg ratio?):
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
Valuation Summary (Explanation of the ModernGraham Valuation Model)
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$45|
|Value Based on 0% Growth||$26|
|Market Implied Growth Rate||6.54%|
|Net Current Asset Value (NCAV)||-$6.51|
Balance Sheet – 9/30/2013Â
Earnings Per Share – Diluted
Earnings Per Share – Modern Graham (Calculating EPSmg)
CVS Caremark is a very good company, but it just barely does not qualify as suitable for either the Defensive Investor or the Enterprising Investor. Â For the Defensive Investor, the company’s current ratio is too low and the company is trading at a PEmg ratio above 20. Â For the Enterprising Investor, the company has slightly too much debt, causing the debt to net current assets ratio to be too high as well as the current ratio. Â From a valuation standpoint, the company fares well in the ModernGraham valuation model after having grown EPSmg (normalized earnings) from $1.86 in 2008 to an estimated $3.09 for 2013. Â The market is implying a growth rate of 6.54%, which is in line with what the company has achieved in recent times. Â Therefore, the company may be fairly valued at this time. Â Any investor considering CVS Caremark should do considerable further research before deciding the company is right for an individual portfolio.
What do you think? Â Is CVS Caremark fairly valued? Â Is the company not suitable for Defensive Investors or Enterprising Investors? Â Leave a comment or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author did not hold a position in CVS Caremark at the time of publication and had no intention of entering into a position in the next 72 hours.
Photo Credit: Â Andrew Magill