The drugstore industry should remain more attractive than the overall market in coming months, given its revenues are typically non-cyclical, i.e. drugstore sales do not fluctuate as much as other industries such as autos and apparel. The main reason is that the industry sells necessities such as prescription drugs and consumer products. In fact, compared to last year at this time, overall retail sales are down -10%, while drugstore sales are still growing at a 2.5% clip (see chart below).
According to our analysis, CVS Caremark has standout fundamentals and valuations, which make it a prime buy candidate within the industry. Among the larger drugstore chains (such as ticker: WAG, MHS and OCR), CVS has the highest net profit margins and free cash flow. The latter is very important in the current environment, since cash is king, especially when most banks are afraid to lend money.
Moreover, CVS’ stock is trading at a 12.13 P/E multiple while the overall industry is trading at 15.31. Similarly, its P/B is only 1.1, which is the lowest among the larger chains in the industry. In addition to strong fundamentals, its valuations are attractive, suggesting that it is a solid buy candidate.
Our Ranking System rates CVS Caremark as a Strong Buy, implying that CVS is not just a leader in the drugstore group, but according to our research it should outperform the overall market.
The chart below illustrates CVS’ stock price in recent months has been trading in a range between $24 and $30. A breach above this this range would be very bullish, while a drop below $24 would force us to re-evaluate our Strong Buy recommendation.
Happy Trading.
Disclosure: No positions at the time of writing.
Tags: CVS, retail sales, strong buy
