Loading...

In this screen, we focused our attention on high-quality stocks that also offer worthwhile price-appreciation potential to 2016-2018. For starters, we restricted our search to equities that get our Highest Rank (1) for Safety. Within our universe of roughly 1,700 stocks, only about 120 meet this criteria. The two key components that determine our rankings are Financial Strength and Stock Price Stability. Notably, investors who put the most emphasis on these qualities are typically willing to sacrifice some long-term total return potential in return for the added downside protection that these equities afford.

Not surprisingly, issues ranked Highest for Safety typically don’t screen well for 3- to 5-year price appreciation potential. As it stands today, 21 (see list below) offer long-term price appreciation potential that exceeds 40%, which is 10% above the current median for the Value Line universe. Of these, we have chosen to highlight the shares of CVS Caremark Corporation (CVS).

CVS Caremark Corporation

CVS is the largest integrated pharmacy health care provider in the United States. Its Pharmacy Services unit, which includes the Pharmacy Benefits Management division (PBM) serves employers, insurance companies, unions, and other sponsors of health benefit plans. Services include plan design and administration, drugs selection, discounted drug purchase arrangements, Medicare Part D services, mail order and specialty pharmacy services, retail pharmacy network management services, prescription management systems, clinical services and disease management services. 

The Retail Pharmacy Segment sells prescription drugs and over-the-counter/personal care products, beauty and cosmetic products, and general merchandise. At the end of 2012, the company had 7,458 locations in 42 states, operating primarily under the CVS/pharmacy name. At that time, it operated in 92 of the top 100 U.S. drugstore markets and held the number one or number two market share in 74 of said markets. Overall, CVS boasts around 20% of the U.S. retail pharmacy market. Prescription drugs normally account for over two thirds of revenues. 

Recently, the company reported impressive third-quarter earnings where operating profit rose over 15%, thanks to the PBM and Retail operations growing 28% and 8%, respectively. Total same-store sales at the retail business increased 3.6%. The pharmacy business alone was up a strong 5.7%, despite a 320 basis point negative impact from recent generic introductions. The company reported that it has retained around 60% of the prescriptions it gained during last year’s impasse between Walgreens (WAG)and Express Scripts (ESRX). Overall, earnings per share (excluding a legal benefit) were $0.02 above the high end of its guidance range. In response to the favorable results, the company rose the midpoint of its 2013 earnings guidance by 60 basis points.  

During its recent earnings call, management explained how its business will be positively affected by new national health care measures like the Affordable Care Act. First, it will participate in the coverage expansion in public exchanges and Medicaid, as well as the private exchange market for active employees and retirees. CVS is already the number one PBM provider in the Medicaid space, so it is well positioned to benefit form that organization’s expansion. Nonetheless, it did acknowledge that some individuals may move from employer-provided insurance to health plan insurance, which may result in margin compression. It thinks this can be entirely offset by cost management initiatives and does not expect a material impact on PBM margins for the foreseeable future. Elsewhere, the retail business is set to benefit from the expansion of coverage and, thus, prescriptions. 

Tailwinds from health care reform in the U.S., coupled with the benefits of an aging baby-boomer generation ought to drive long-term earnings growth. Indeed, the midpoint of our long-term price projection range is now 45% above current levels. The company is also set on returning money to shareholders via dividends and share repurchases. Although the current yield of 1.5% is not overly exciting, the company has been repurchasing shares at a healthy clip. Indeed, CVS expects to return $4 billion in cash to its shareholders in 2013 via buybacks. Further, it scores high marks for Price Stability and Earnings Predictability, and is ranked 1 (Highest) for Safety, making it a good risk-adjusted option.

 

Company

Ticker

Allergan, Inc.

AGN

AmerisourceBergen

ABC

Cardinal Health

CAH

Check Point Software

CHKP

Cisco Systems

CSCO

ConAgra Foods

CAG

CVS Caremark Corp.

CVS

Dollar Tree, Inc.

DLTR

Int'l Business Mach.

IBM

Intel Corp.

INTC

Intuit Inc.

INTU

Kyocera Corp. ADR

KYO

Laboratory Corp.

LH

Novo Nordisk ADR

NVO

Oracle Corp.

ORCL

PepsiCo, Inc.

PEP

Royal Dutch Shell 'A'

RDS/A

Sysco Corp.

SYY

Teva Pharmac. ADR

TEVA

Total ADR

TOT

Varian Medical Sys.

VAR

At the time of this article's writing, the author did not have positions in any of the companies mentioned.