Ryan Fuhrmann, CFA
February 2, 2007
Fellow Fool Matthew Crews put it well when he recently said these are interesting times for drugstore operator CVS (NYSE: CVS) as it pursues increasingly large and complicated acquisitions. But has the company bit off more than it can chew?
Investors may soon look back longingly to the day when CVS focused as much on organic, or internal, means to grow its business as it does on acquisitions to buy outside market share. That’s because right now the company has quite a lot on its plate. First off, it recently took on a sizeable debt load to purchase 700 Sav-on and Osco stores from Albertsons and also took on Minute Clinic to create health clinics in its retail stores.
More recently, it announced an intent to greatly enhance exposure to non-retail avenues to deliver drugs to customers by purchasing pharmacy-benefits manager (PBM) Caremark (NYSE: CMX). It’s still unclear whether the deal will happen, because rival PBM Express Scripts (Nasdaq: ESRX) also wants to buy Caremark, but the developments could have significant ramifications across the entire health-care industry.
So while CVS’s sales grew 18.4%, same-store sales advanced 8.3%, and earnings grew 10.3% for (even including merger-integration charges) for the year, those strong numbers will do little to drive the stock until it is determined whether Caremark shareholders will go the way of CVS or Express Scripts. That’s a shame, because CVS has posted a long string of double-digit sales and earnings gains and should be able to grow considerably going forward, since aging baby boomers will increasingly need pills and other medications to stay spry well into their golden years.
On the other hand, maybe CVS is ahead of its time and in the process of blazing a new health-care trail by combining a large retail drug and PBM business to control a major proportion of how drugs reach consumer hands. The problem is that it will take some time to reach a concrete conclusion, and there could be major ups and downs along the way.
I’ve decided to play it safe and invest in Walgreen (NYSE: WAG), which mostly eschews acquisitions and prefers to go it alone by opening new stores and running its own PBM business. Looking inward rather than outward is a proven road to positive stock returns, as witnessed by Walgreen in the drug retail space or Sonic (Nasdaq: SONC) in the restaurant arena. The pursuit of acquisitions is another potentially lucrative avenue but is more fraught with peril.
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Fool contributor Ryan Fuhrmann is long shares of Walgreen but has no financial interest in any other company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.