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CVS Caremark Corporation (CVS), Walgreen Company (WAG), Express Scripts Holding Company (ESRX): What Is the Best Play on Retail Pharmacies?

CVS Caremark Corporation (NYSE:CVS)CVS Caremark Corporation (NYSE:CVS) is one of my favorite “safety” stocks, that is, a company that is well positioned to do well in any type of economic environment. The company makes well over half of its money from its pharmacy services, and with the aging U.S. population and new health care laws, demand for prescription medications isn’t going anywhere anytime soon.

My only concern is that with shares trading just below their 52-week highs, I wonder whether or not they are still a good value or if they no longer make sense as a new investment. With CVS Caremark Corporation (NYSE:CVS) set to report earnings on Tuesday, August 6, now seems like a good time to take a look and see if CVS Caremark Corporation (NYSE:CVS) is still a good value, or if one of the alternatives would make a better investment.

The current state of CVS

As of the latest data available, CVS Caremark Corporation (NYSE:CVS) operated just under 7,600 stores in 45 states. The company filled almost 720 million prescriptions last year, which is a 21% share of the entire U.S. retail pharmacy market.

CVS Caremark Corporation (NYSE:CVS) sells a variety of products in its stores, but the majority comes from the pharmacy, which accounts for 69% of the company’s sales. An additional 11% of CVS Caremark Corporation (NYSE:CVS)’s sales come from over-the-counter medications and personal care products, so medical-related spending makes up 80% of the company’s revenue. While CVS does have many other products, such as cosmetics, photo services, and groceries, it would be fair to say that healthcare spending is crucial to the company’s bottom-line.

In good times and bad?

While it makes sense that CVS would do better than most retailers during a recession, let’s take a look to see how they actually fared during the most recent one. Looking at the company’s annual revenue from 2007-present, we see that the only drop in sales was a very slight one between 2009 and 2010. Since then, shares have increased to a level well beyond the company’s pre-recession numbers. CVS also raised its dividend every single year during that period of time and also continued share buybacks, lowering the outstanding share count every year.

The numbers and future growth

Looking ahead, CVS should experience moderate sales growth for the rest of this year, and is projecting $400 million in new pharmacy benefit management (PBM) sales, as well as about 1.4% retail sales growth. The time to really watch CVS’s numbers will be after January 1, 2014, when the amount of insured consumers is expected to rise significantly as a result of the Affordable Care Act. Since payments from members of prescription drug plans accounted for 98% of CVS’s pharmacy sales last year, I’d say that this is indeed a very big deal to the company.

Currently, shares trade for 15.3 times this year’s expected earnings of $3.98 per share, which looks pretty good considering the amount of growth projected for the coming years. As a result of the increased pharmacy business mentioned above, earnings are projected to rise to $4.45 and $5.00 in 2014 and 2015, respectively, for annual growth of 11.8% and 12.4%. Before we go diving in, let’s see how this stacks up to the alternative plays in the sector.

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