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CVS Seen Undervalued, Rewards Investors Well

By    |   Monday, 06 February 2012 08:01 AM

Pharmacy chain CVS (CVS) is undervalued, growing and rewards its investors well, analysts say. CVS’s earnings, cash flow and dividends have notched double-digit increases for the past five years and show no signs of letting up. No surprise, then, that the drug store is a Warren Buffett favorite.

CVS is the second-largest drug store operator in the United States after Walgreen (WAG). CVS has more than 7,300 drugstores in 44 states. In 2010, 68 percent of CVS’s retail sales were fueled by pharmacy operations. CVS keeps filling the pipeline with new store openings and strategic acquisitions, snapping up the world’s largest pharmacy benefit manager Caremark in 2007.

For third quarter 2011, CVS reported total sales of $26.7 billion, up 12.5 percent from $23.7 billion. Pharmacy sales soared 25.8 percent in the quarter. Total earnings per share were 70 cents, up from 64 cents.

For full-year 2011, the analyst consensus earnings estimate is $2.80, compared to $2.50 in 2010. The 2012 estimate for CVS is $3.23.

CVS is profiting from healthy trends too, say analysts. Aging baby boomers and growing demand for prescriptions will fuel future sales and earnings.

Using its healthy cash flow, CVS also handsomely rewards shareholders. In the first nine months of 2011, CVS spent $3 billion on share buybacks and dividends. It has promised $3 billion more share in repurchases in 2012. The Rhode Island company also promises to raise its dividend 25 percent annually through 2015.

Growth ahead

CVS is an analyst favorite. Of the 26 analysts followed by Thomson/First Call, seven have strong buy recommendations and 16 have buys, with only three holds.

S&P analysts have a strong buy rating and a price target of $49 on CVS, citing its strong market share and expanding margins in 2012.

The company next reports on Feb. 8.

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