Friday, January 8, 2010

CVS

I have a lot of catching up to do on two leftover posts from the last two radio shows plus other blogs I have wanted to compose on issues.  A question about CVS requires more immediate attention.

On the last radio show, 1/2/2010, a caller asked about CVS and said the PE was 13.  We do not screen calls and this means there is no way to have data on my personal computer screen already up to answer specific questions.  On this day, the station's wireless network was not strong enough to load any website much less the two services I normally have up in case anyone asks a specific question.  I pulled up a public website on the station's computer with an old square monitor which could not display a full page and I had to move the screen display right-left to read data.  Unfortunately, this public site also had a typo for PE at 1.3 when it should have read 13.1 (13.9 today).

Be that as it may, I was right in my quick review of the financial information and key ratios and description of the company and the advice which I gave, which was that I would not buy this stock.  As I explained to the caller, I never recommend a buy for a stock or fund on air, because should a statement could be construed by any one listening, without regard to individual suitability, as applying to them.  I might say that a stock or fund might be worthy or research or being placed on a watch list.

I have a "Disciplined Rules for Buying and Selling Stocks" that I give clients, which has 39 disciplined investing rules.  It could have more, but the 39 are enough to overwhelm most common investors.

CVS has a return on equity (ROE) of 10.9%, it should have at least 15% to be considered.  It appears that its history of increasing annual earnings will disappoint in 2009 with earnings close to 2008.  You want to see quarterly earnings up 25% or more and three such successive quarters are even better.  You want to see quarterly sales up 25% or more (last quarter for CVS was 18% and next quarter is estimated at 11%).  Free cash flow is only .55%.

I told the caller that CVS has been making acquisitions and it may be having difficulty in integrating these acquisitions and that it has a benefits management program that may be having earnings problems with respect to competition and Medicare Part D.

I told the caller that there was a very sharp price drop in November and institutional investors were selling more than buying (this week has seen an increase in institutional buying).  These are very bad signs as there must be a reason.  In fact, the price dropped below it 200 day line, which is a huge negative, on November 5th, which is the same day CVS held an analysts cal conference.  We discussed that the Long's acquisition was still being integrated into CVS.  The announced that the director of the benefits management program was retiring and the marketing director was being replaced.  The benefits management program has lost several contracts as the result of competition and the economy and it has had problems, as many benefits management programs have had, with properly underwriting its Medicare Part D program, which has resulted in smaller margins and less revenue and lower profits.

This stock belongs ranks 4th in its market group, although second in EPS.  There are 188 industry groups performing better in the market.  Its profit margin is 6.8%.  It debt to equity is 23%.  75% of the stocks in the market are performing better than CVS.  It is going to take a considerable effort to reach a proper buy point.

I was right in my advice despite technical difficulties.  This might be a stock one would place on a watch list, but nothing more.


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