How High Can CVS Caremark Go?

Shares of CVS Caremark (NYSE: CVS  ) hit a 52-week high today. Let's look at how it got here and whether clear skies are ahead.

How it got here
The demise of the health-care business has been greatly exaggerated, and CVS is capitalizing on continued growth in the pharmaceutical industry. Strong financial performance has helped drive the stock to a new high, and right now it appears that the company can continue to improve performance.

In the first quarter of 2012 the company reported a 19.9% increase in revenue to $30.8 billion and a 14.7% increase in adjusted earnings per share to $0.65. Management also raised full-year guidance to earnings of $3.23 to $3.33 per share on stronger confidence that growth will continue.

The pharmacy services segment has driven growth over the past year, growing 32.3% to $18.3 billion in the first quarter. The company's acquisition of the Medicare prescription drug plan from Universal American Corp. helped drive that growth.

The success CVS has had over the past year on the market hasn't been an industrywide trend, as you can see below. Walgreen (NYSE: WAG  ) has struggled, and Rite Aid (NYSE: RAD  ) has experienced anemic growth and big losses, causing the stock to plunge. Walgreen got nailed after the Express Scripts fallout, and Rite Aid continues to limp along with a massive ball and chain of debt.

CVS Chart
CVS data by YCharts.

From a valuation perspective, CVS still has some upside potential if growth can increase return on assets.

  Price/Book Profit Margin Return on Assets Forward P/E
CVS Caremark 1.6 3.1% 6.2% 12.5
Walgreens 1.9 3.6% 9.3% 10.5
Rite Aid N/A (1.4%) 2.2% N/A

Source: Yahoo! Finance.

Right now, Walgreens may look like a better buy based on forward P/E, return on assets, and profit margin, but the company isn't growing nearly as quickly as CVS right now, making the comparison a bit more even.

What's next?
CVS has performed well on the market over the past year and I don't think the outperformance will stop. CVS offers a convenient retail product, and pharmacy sales don't show any signs of slowing. The company's recent earnings release and increased guidance makes me confident that there is more upside to come, especially if the economy continues its slow recovery.

How high can the stock go? I think a price-to-earnings ratio of 15 times 2013 earnings is reasonable, especially if estimates keep going up, indicating another 20% of upside.

The CAPS community seems to agree, giving the stock a four-star rating from 1,649 out of 1,717 players who have rated the stock. I'm also making a CAPScall, adding an outperform call on My CAPS page, which can be found here.

Interested in reading more about CVS Caremark? Click here to add it to My Watchlist, and My Watchlist will find all of our Foolish analysis on this stock.

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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