Would You Invest in This Drug Retailer?

Pharmacy retailer-cum-benefits manager CVS Caremark (NYSE: CVS  ) has struggled to cope with rising costs. Though the top line increased by double digits in its most recent quarter, its bottom line struggled. Let's take a closer look at whether CVS deserves a place in your portfolio.

CVS steps it up
CVS's revenues have improved as a result of its long-term contract with Aetna (NYSE: AET  ) and the acquisition of Universal American's (NYSE: UAM  ) Medicare prescription-drug business.

CVS has tried to boost flagging front-end sales by opening new stores, which should add to the top line. In addition to recently opening 41 new stores, taking its total store count up to 7,266, it also recently entered a deal to provide mail-order pharmacy services to more than 5 million U.S. federal employees, retirees, and dependents.

Is the price right?
Let's see how the company is valued compared with its industry peers.

Company	Trailing P/E	Forward P/E	TEV/FCF
CVS Caremark	13.68	10.55	12.75
Rite-Aid	N/A*	N/A*	N/A*
Walgreen	12.81	9.87	12.47

Sources: Yahoo! Finance and Capital IQ, a division of Standard & Poor's.
* Negative earnings/and or free cash flow.

Looking at the P/E and enterprise-value-to-free-cash-flow ratio (TEV/FCF), we see that CVS is valued more-or-less in line Walgreen. The gap between its current and forward P/E means that analysts expect a lot of growth from the company over the coming year. But with Express Scripts (Nasdaq: ESRX  ) and Medco (NYSE: MHS  ) set to join forces, the pharmacy benefits management (PBM) space has become even more competitive, so things might become a little bit tougher for CVS going forward. The deal would create an industry leader in the PBM space, with the combined entity commanding nearly one-third of the market. The deal has received opposition from other pharmacists, who argue that the amalgamation of two of the industry leaders would lead to higher prices.

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