CVS Caremark Feels Wal-Mart Heat

CVS Caremark Corp. (CVS) is one of the leaders in the domestic drug store industry and the pharmacy services industry. The management embarked on an aggressive expansion strategy, including the merger of equals with Caremark.

There is substantial operational risk concerning the integration of the five significant acquisitions that were closed during the last two years. Also, generic drug introductions and Wal-Mart’s (WMT) entry into the generic drug industry are negatively impacting the profitability of the drug store industry, including CVS Caremark. Therefore, the stock is rated a Hold.

Due to the company’s periodic earnings disappointments and aggressive acquisition strategy, the stock is best valued on a price-to-sales basis. The stock traded in the range of 0.37 to 0.80 times sales over the last five years prior to the merger with Caremark and Osco & Sav-On drugstores. The target is $38.50, which is based on a valuation of a 0.65 price-to-sales ratio on normalized 12 month trailing sales.

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