CVS Remains Strong, Could Benefit from Acquisition

CVS Caremark Corporation (NYSE: CVS) may have dropped on lower earnings over at Walgreen Company (NYSE: WAG), but a closer look at the earnings report may not justify the move downwards. Walgreens reported profits that fell 10 percent in its fiscal first quarter, but the lower results were primarily attributed to costs to open more than 200 new stores.

Prescriptions, which represent the majority of sales at both CVS and Walgreen’s, are widely expected to be flat in 2009. Walgreen’s reported a 6.2% increase in overall prescription sales, but saw only a 2.6% growth in same-store sales for the segment. Many analysts expect the industry to report a 0.5% drop in prescriptions during the same period, according to IMS Health and Walgreen’s figures.

CVS investors may not have high expectations for prescription sales figures, but will be watching the firm’s acquisition of rival Long’s Drugs very closely. The hotly debated acquisition drew at least one activist who insisted that the acquisition sharply undervalued Long’s real estate portfolio. Investors will be watching how management unlocks this value and leverages its infrastructure to improve the brand.

Activist investor William Ackman’s Pershing Square believed that the real estate under Long’s stores were worth some $1 billion and even found parties willing to pay substantially more than CVS’s $71.50/share offer. CVS also noted that it intends to make money off of these assets by either selling them or generating cash through sale-leaseback transactions. This could spell substantial value for CVS shareholders over the long-run.

Investors looking to take advantage of the long-term prospects for CVS given its low multiple and strong prospects may want to take a look at long-term options called LEAPS – or long-term equity anticipation securities. Currently, investors can purchase $25 January 2011 LEAPS call options for just $8.10 per contract. This would give the holder the right, but not obligation, to purchase 100 shares of CVS at $25 per share anytime during the next 760 days.

See “Using LEAPS as a Stock Substitute” for more information on this strategy.

 Email This Story
Join LEAPSInvestor.com