Investors in CVS Caremark (NYSE: CVS ) got a double dose of good news yesterday. Healthy third-quarter results and the completion of the Longs Drug (NYSE: LDG ) acquisition sent the stock soaring 11%.
It's been a nervous spell since the company announced an agreement to acquire Longs Drug. The stock had shed 30% of its value since mid-August amid concerns that Walgreen (NYSE: WAG ) might ink the deal instead. Investors also questioned whether this was the right time for CVS Caremark to go shopping, and wondered what kind of numbers the company would post for this quarter amid the global economic turmoil. All this chatter was quieted yesterday.
Comparable-store sales rose 3.7% in the most recent quarter, in line with where the company has been all this year. That's actually a pretty amazing result given the current retail environment, and shows the strength of the franchise. Management noted that growth in prescriptions has been slowing, attributing that to consumers skipping doctor visits (hence fewer prescriptions being written). But over-the-counter cough and cold products are up nearly 10% year to date, with self-medication a growing theme. Either way, CVS Caremark is getting the business, as the company has been consistently gaining market share. That's an important factor as discounters like Wal-Mart (NYSE: WMT ) and Target (NYSE: TGT ) get in on the prescription action.
Gross margins expanded by 60 basis points, while operating expenses fell as a percentage of sales. This netted to CVS reporting earnings from continuing operations up a healthy 18.8% for the quarter. The only blemish on these financials is an $83 million non-operating charge (net of taxes) for the Linens-n-Things factor. CVS used to own the company, and is still a guarantor on some of its leases. With Linens-n-Things going the liquidation route, CVS expects to have to pony up on these obligations.
No liquidity concerns here that I can see. CVS generated $386 million in free cash flow this quarter, and was able to fund the Longs Drug acquisition from cash and existing credit facilities. To quote CFO Dave Rickard, "we had billions available to us that we simply didn't need."
The nub of this is that CVS emphatically put investor concerns to rest. So the only question left is: Is CVS stock cheap? Well ... it's not nearly as cheap as it was a few days ago. In this environment, when stock indexes can swing 10% either way in a single day, I'm cautious about putting a "cheap" moniker on any stock.
Foolish investors who favor growth stocks would be well advised to make sure those companies are actually growing at a healthy clip. CVS continues to fit that bill.