The Financial Analysis of CVS Caremark Corporation

CVS Caremark Corporation (CVS Caremark) is a health care provider in the United States. It is a pharmacy that provides health care options for its consumers through various outlets. CVS.com, mail orders, retail locations, Caremark Pharmacy Services and its clinic subsidiary are just a few ways that CVS keeps its name out there as one of the most leading pharmaceutical companies. According to Reuters website the Company competes with Medco Health Solutions, Inc., Express Scripts, Inc., United Healthcare, Aetna and CIGNA. CVS is a large pharmaceutical company that has about 7000 pharmacy retail stores in over 25 states. The purpose of this paper is to probe the companies financials and determine if I would in fact invest my financial capital in CVS as a shareholder and if I would invest myself as a whole in CVS as an employee.

Researching the past financials of CVS will assist me in finding out this information and assessing the organization as a whole. Evaluation of Internal and external financial statements Company Overview Cvs Caremaker is one of the largest provider of health care services and offerings that impacts everything from pharmacy plan design to the ultimate delivery of products and services to customers. CVS Caremark (symbol: CVS) is the result of a merger between CVS pharmacy and Caremark in 2007. Filling over 1 billion prescriptions annually, it is the number 1 provider of prescriptions in the United States. It operates over 6900 retail outlets across the US and under CVS pharmacy. It is also into drug retail store, pharmacy benefit management, mail order and specialty pharmacy division. It is headquartered in Woonsocket, Rhode Island and employs about 200,000 people. The Company sells their products through CVS retail stores and through their online store. They also provide pharmacy benefit management services which include mail order pharmacy, plan design and administration, specialty pharmacy and other services .The Company operates in two business segments which are Pharmacy Services segment and Retail Pharmacy segment. Accordingly, the management of the company sees to it that they are able to handle their company through effective management. However the internal and external factors affect the functioning of the company. Business CVS Caremark has two primary business segments: Retail Pharmacy Segment CVS Pharmacy provides approximately 7,000 retail pharmacy locations around the United States.

Medicines and other products can be conveniently purchased. Pharmacy Services Segment Caremark provides Pharmacy Benefits Management services to a variety of companies. A PBM works to reduce prices of drugs and increase the efficiency of distribution. Another aspect of the business worth mentioning here is Minute Clinic. Minute Clinic is a collection of 570 locations, many of which within CVS pharmacies, where patients can walk in without an appointment and receive basic medical care. Staffed by nurse practitioners and physician assistants, Minute Clinic offers safe but fairly low-cost service for many simple health issues.

Colds, allergies, sprains, infections, rashes, and so forth can be treated at these locations, and they also offer preventative care in the form of vaccinations and health screenings. Impact of Internal and External Factors The internal factors may be viewed as the strength or weaknesses depending upon their impact on the organizations objectives. Management, specifically strategic management has four functions . These include planning, organizing, leading and controlling. The functioning of these functions within the organisation upshots the operation of the business activities. The external factors which includes the competitors and factors like economic, social and political as well as technological change ,cultural changes, changes in market places or competitors position. Swot Analysis Internal analysis of CVS Strengths: 1) Significant investment in technology 2) Loyalty card program 3) Diversified retail stores 4) Strong brand equity Weakness: 1) Inconsistent store experience and execution 2) Sales mix focuses on lower margins 3) Leveraged from acquisitions 4) Real estate (when compared to Walgreens) External analysis of CVS Opportunities: 1) Turn around acquired stores 2) Beauty 360 3) New target markets with minute clinics 4) Private label expansion Threats: 1) Traditional stores like Walgreens and Non-Traditional stores like Walmarts as competitors 2) Pharmacists shortages 3) Further PBM market share loss. Financial Analysis and Evaluation Financial diagnostic categories Chosen company vs. Benchmark competitor 1.) Liquidity of short-term assets-Current ratio-1.5x -Cash ratio-.083x -Quick ratio-0.5x-Current ratio-1.60x -Cash ratio-0.25x -Quick ratio-0.58x 2.) Long-term debt-paying ability-Debt ratio-0.30 -Debt-equity ratio-30.4-Debt ratio-0.40 -Debt-equity ratio-41.2 3.) Profitability -Net income/sales (profit margin)-.013 -Net income/assets (ROA)-6.3% -Net income/shareholder equity (ROE)-9.59%-Net income/sales (profit margin)-.036 -Net income/assets (ROA)-10.3% -Net income/shareholder equity (ROE)-16.4% 4.) Asset utilization/ management efficiency-Total asset turnover-1.6x -Inventory turnover measures-7.5x -Accounts receivable turnover-18.0x-Total asset turnover-2.90 x -Inventory turnover measures-5.56x -Accounts receivable turnover-20.2x 5.) Market measures-Price/earnings ratio-12.6 -Earnings per common share-1.08 -Price/earnings ratio-14.2 -Earnings per common share-1.14 Results of Evaluation CVS Caremark is the result of the merger between CVS pharmacy and Caremark in 2007. Filling over 1 billion prescriptions annually, it is the number one provider of prescirptions in United States According to the statement of financials such as balance sheet, statement of income and loss and cash flow statement, the following interpretations are drawn including 2005-06 prior merger 2007-10 post merger: 1) The gross profit dollars were increasing from last five years i.e from 2005 to 30th sept 2010 at the rate of 1.6%. however the gross profit were essentially flat in both the 3 and 9 months ended sept 30 2010 as compared to the prior years period.. Gross profit as a percentage of net revenue increased 70 basis point to 21.0 in the three months ended sept 30 2010. 2) The Net income for 5 years annual average is 32.60 exhibiting an increase in the amount of revenue on 3) Between 2007 and 2009, revenue grew by an average of 13% annually, during the same period the earning grew by an average of 18% annually. 4) In 2009, CVS experienced a multi billion dollar loss of contract for 2010, due to over- pricing and communication issues.

Management for that segment since has changed 5) For 2010, CVS Caremark revenue and earning are slightly down and CVS revenue and earnings were slightly up. 6) The uncertainity has resulted in a low stock valuation i.e. profit/earning less than 11. 7) The company has a currently dividend yield of about 1.25% with 15% annual dividend growth over past couple of years. 8) Before the merger, CVS 5 year EPS growth rate 71.26% has surpassed the industry average of 28.28% 9) From the period 2007-09, CVS Caremark has grown operating cash flow by an average of nearly 12% annually. 10) CVS has a very clean balance sheet with total debt-equity ratio of only 0.33% 11) Over the period 2007-09 i.e. after the merger, the net income has grown by an average of 18% annually. 12) However the sales for the year 2005-06 is equal to 28479.2 and 29476.0 respectively showing an increase of 3.5%. Result of ratio analysis 1) The Liquidity of short-term assets which includes Current ratio, Cash ratio and quick ratio shows that CVS Caremark is in a better position to meet the firm s current obligations. The current ratio of CVS being greater than 1 shows the firm has more current assets than current claim against them. However, the Liquidity ratio of Wallgreen is slightly higher than CVS. 2) Long term debt paying ability is to determine the proportion of debt in total financing. The debt ratio of CVS is 0.30 which means that the lenders have financed 30% of CVS Caremark s net assets i.e. capital employed.The total debt equity ratio shows firms total debt in the relation to the total dollar amount owners have invested in the firms. 3) Profitability ratio indicate the firms ability to generate returns on its sales , assets and net profit margin. The net profit margin ratio is measured by dividing profit after tax by sales.

Operating profit after tax to sales ratio is .013. Net profit margin ratio establishes a relationship between net profit and sales and management s efficiency in manufacturing, administering and selling the products. The return on asset for CVS is 6.3% and for Wallgreen 10.3% which implies on the operating performance and ignores that how the firm is financed and taxed. The ROE for CVS and Wallgreen 9.59% and 16.3% respectively 4) The asset turnover ratio indicate how effeciently the fiem is utilising its assets to produce revenue and sales. CVS has a asset turnover of 1.6 times where Wallgreen has 2.9 times. Inventory turnover measure indicates whether the inventory is out of line in relation to the volume of sales when compare against industry norms.

The CVS has 7.5 times and Walgreen has 5.56 times which shows that CVS has more inventories in respect to the volume of sales. 5) The price earning ratio is the market price of the firm s common stock divided by the annual earning per share.Comapring the P/E relative to that of the stock market as a whole or the firm s competitors indicates the market s perception of the true value of the company. The P/E for CVS and Wallgreen is 12.6 and 14.2 respectively. Assessment of Financial activities and their effects on organisational performance CVS Caremark is an interesting company. The merger of CVS and Caremark resulted in a company that is complex, and many investors and lawmakers are uncertain about whether this merger was appropriate. Time will only tell, but due to the uncertainty, the stock valuation is quite low, and this could be a nice opportunity. With a P/E ratio of under 13, combined with large growth between 2007 and 2009, the investment looks easy. With these numbers, investment returns should be spectacular.

The catch, however, is that in 2009, CVS Caremark announced that its Pharmacy Services segment (the Caremark aspect of the business) lost $4.8 billion in contracts, and the Medicare part D contracts also fell sharply as well due to overpricing. This combination resulted in a change of management of that business segment.

The error is largely blamed on poor communication of the new business model to clients. The odd merger, and poor communication to clients of what that merger means to them, spooked clients into dropping contracts for 2010 during this period in 2009. What this means is that although 2009 revenue and earnings were excellent, the numbers for 2010 aren t as good because of a loss of contracts. This is the reason for the low stock valuation, as when this was announced, the stock price dropped 20-25% in a single day and hasn t recovered. For the first half of 2010, CVS has indeed experienced minor reductions in revenue and profits, but has kept EPS in a state of moderate growth.

Full year estimates for 2010 EPS are very close to what EPS was in 2009, and 2011 EPS is expected to increase once again. The good news is that there is a silver lining. The company is focusing on having an effective pharmacy services bidding season for 2011 (unlike their disaster for the 2010 bidding season). The company indicates that the incident was isolated, and with new management this may very well be the case. In addition, CVS retail pharmacies are performing very well. Even while the pharmacy services segment reported decreased revenue and profits for 2010 (as predicted by the company last year), the retail segment continued to grow. CVS retail pharmacies had 6.3% same-store sales growth in 2005, 8.1% same-store sales growth in 2006, 5.3% same-store sales growth in 2007, 4.5% same-store sales growth in 2008, and 5.0% same-store sales growth in 2009. They are also constantly increasing their total number of CVS retail pharmacy locations. There were 6,301 locations in 2007, 6,981 locations in 2008, and 7,074 locations in 2009. What this means it that CVS is both increasing their number of retail pharmacy locations AND obtaining more revenue from each of their locations. This is consistently impressive, and great news for shareholders. The CVS pharmacy is a great business model.

They primarily provide prescription drugs (and increasingly generic drugs to save customers money) and over-the-counter medication, but also provide various things like toothpaste, birthday cards, toys, food, and beauty supplies, all in a very small store that is often located very close to where people work and live. The prices are pretty good even though they aren t quite as competitive as Wal-Mart, and they make up for this by providing their own brand of products at reduced prices compared to identical national brands. It s also a lot more convenient to stop in at a retail pharmacy to grab a few quick necessities on the way home from work than it is to go out of one s way to enter the lumbering parking lot of Wal-mart and deal with all of the hassle and lines there. So retail pharmacies do have their important niche. Minute Clinic is another great business, with simple and inexpensive medical treatment in convenient locations without the need to make appointments. Lastly, the company is growing its dividend and buying back shares, channeling a lot of its cash flow back to shareholders. Risks CVS Caremark is a fairly uncertain investment. The retail segment is fairly sturdy, with a solid name brand embedded in a growing industry, and faces primarily demand and commodity cost risks. The pharmacy services segment, however, is the riskier of the two, as the industry is intensely competitive and there are a variety of questions about whether this merger was a good idea or not. 2009 saw a large drop in stock price due to poor performance of this segment. It is said that there is a risk of the company being divided, but some may view that as an opportunity rather than a risk. Final decision and Conclusion CVS Caremark may be a moderately speculative investment.

The retail pharmacy segment is rather clear-cut and healthy, while the pharmacy services segment is unstable and skittish. The last year s performance was poor, and the hope is intact that with new management and improved communication to clients, they vastly improve this year. The good news is that this stock is very cheap. With a P/E of under 13, CVS Caremark stock is at a reduced price compared to competitors like Walgreens (WAG) with a P/E of over 13 (which is still fairly low). The 20-25% drop in stock price that resulted from the announcement of lost contracts was an overreaction, as earnings are still strong. Most of the drop was due to uncertainty and the validation of long-term fears that the merger was not a good idea, rather than a massive 20-25% loss in company value. The uncertainties of the merger, along with the poor performance of 2009 have been factored in, and I expect the company to do quite well over the coming years.

All segments of the company are great businesses, with the primary question being whether they are great together or better off as separate entities. I find the current stock price in the upper $20s to be very attractive as an investment. So I would like to make an investment in the share stock of CVS Caremaker as it is expected to yield higher returns as compared to previous years. Since the company has changed its management with new policies and improved communication with employee relation I would prefer to be an employee of the organization to the position eligible to me.

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