Forecasts put CVS atop peers

Your Money

December 03, 2006|By Andrew Leckey | Andrew Leckey,Tribune Media Services

What does the future hold for my CVS Corp. shares?

- K.T., via the Internet

The future looks bright in a rapidly consolidating drugstore industry in which it is a leader.

But it is a fiercely competitive field.

CVS, with more than 6,000 stores, has yet to match the profitability per store of traditional rival Walgreen Co. It is actively replacing many stores within strip malls with more profitable free- standing corner locations to try to narrow that profitability gap.

Meanwhile, discount retailer Wal-Mart Stores Inc. recently rolled out a plan offering many generic drugs for $4 a prescription. It is expanding that strategy to various states, and neither CVS nor Walgreen has matched it.

CVS definitely hasn't been standing still. This aggressive acquirer recently agreed to buy pharmacy-benefits manager Caremark Rx Inc. in a stock deal worth about $21 billion. The resulting CVS/Caremark would have $75 billion in annual sales and manage a billion prescriptions annually, which is more than one-fourth of the U.S. total.

That shocker of a deal is being watched closely for its impact on the nation's health care delivery system. CVS already has a small pharmacy-benefits manager and Walgreen has been building its own.

Third-quarter earnings at CVS rose 12 percent, aided by its acquisition of 701 Savon and Osco drugstores in June. Sales at existing stores have been on the rise. Caremark Rx earnings increased 25 percent thanks to additional Medicare services revenue.

Shares of CVS (CVS) are up 8 percent this year after gains of 17 percent last year, 25 percent in 2004 and 45 percent in 2003.

Because it derives 70 percent of sales from dispensing pharmaceuticals, CVS should benefit from growing needs of aging baby boomers and the Medicare prescription drug benefit.

Consensus Wall Street rating of CVS shares is a "buy," according to Thomson Financial. That consists of six "strong buys," six "buys" and seven "holds."

Earnings are expected to rise 12 percent this year versus 10 percent projected for the drugstore industry. Next year's forecast of 23 percent compares with 15 percent expected industrywide. The five-year annualized return of 15 percent exceeds the 13 percent projected for its peers.

What does diluted and undiluted mean in earnings? I've heard both used and it confuses me.

- F.M., via the Internet

Companies report both, which is potentially confusing for investors. Keep in mind that they do represent significantly different measures.

Basic undiluted earnings per share represent the total earnings per share based on the number of shares outstanding at the time. Diluted earnings per share represent the result if all stock options, warrants and convertibles were to be exercised.

The diluted earnings will therefore never be larger than the undiluted earnings.

"Diluted earnings assume the worst-case scenario and are the less lenient and more conservative of the two measures because they take into account the eventuality of what could happen," said Stephen Biggar, vice president of equity research at Standard & Poor's in New York. "We ignore the basic and go with the diluted."

Current undiluted earnings should always be compared directly with past undiluted earnings, just as diluted should be compared only with diluted.

yourmoney@tribune.com

Andrew Leckey writes for Tribune Media Services.

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