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Financial Research Report

CVS Caremark Corporation-Overview

CVS Caremark is the largest integrated pharmacy company in the United States of

America with a mission of helping people to achieve better health. As of 2013 the company had

over seven thousand four hundred CVS/pharmacy stores spread throughout all the states of the

United States of America. The company also operated more than six hundred Minute Clinics

under it retail health clinic system. Other product lines that the company offers to its target

market includes; Medicare Part D Prescription drug plans, retail health clinic systems and mail

order, retail and specialty pharmacy (Lofberg & McCrossan, 2010). The company leads in

pharmacy innovation due to its capabilities that are unmatched in its industry and also prides

itself as the only company that continually strives to improve health in the country. The

company through its Pharmacy Advisor program strives to improve health and lower cost of

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health care by developing new approaches that help people deal with difficult diseases such as

cancer and diabetes. This it does by enabling these patients to obtain and stay on their

medications which enables them to live as long as possible while leading productive lives. CVS

Caremark thus continues to lead in the United States of America as the largest provider of

prescriptions (Lofberg & McCrossan, 2010). The number of prescriptions that the company

manages or fills exceeds one billion annually. The company is viewed by many industry experts

and analysts as leading in the transformation of health care service delivery in the United States

of America through its breadth of service offerings which are unmatched. The company also

operates an online pharmacy whose universal resource locator is CVS.com (Lofberg &

McCrossan, 2010).

The company’s headquarters are found in two locations. The first being in Woonsocket in

Rhode Island and the second which overseas its pharmacy services business being

headquartered in Nashville in Tennessee in the United States of America. The company made

it into the Fortune 500 magazine in 2013 where it climbed to number thirteen in the list of the

largest corporations in the United States of America. The company is also the largest company

that has its operations within the borders of the United States of America (Business Wire, 2007).

The company’s business is organized mainly into three operating segments or divisions namely

the walk in clinic otherwise known as Minute Clinic of which it operates over six hundred of

such and operates them within CVS/pharmacy stores, Caremark Pharmacy Services and CVS

Pharmacy business segment (Boyle, 2009). CVS pharmacy is noted as contributing one in every

seven prescriptions to patients in the United States of America and contributes over sixty eight

percent of CVS pharmacy revenues from the pharmacy business alone. The corporation division

of CVS Caremark Pharmacy Services is renown as a leader in pharmacy benefit management

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(PBM) companies as it offers more than over 2,000 health plans prescription benefit

management services which are said to be comprehensive to leading corporations and

government entities. The company provides top of the range customer service through its modern

call centers.

Rationale for investing in CVS Caremark Corporation

CVS Caremark Corporation is one of the leading integrated pharmacy businesses

in the United States of America. By investing in the company’s stock, bonds, commercial paper

etc the investor will own part of the largest companies in the United States of America according

to Fortune Magazine of 2013. This ranking has monumental benefits which include the fact that

the company is able to access cheaper financing because of its reputation. Its products will sell

with minimal effort as most people will want to own something that is made by the largest

company in the United States of America. The company falls in the radar of numerous regulatory

authorities, national administrators and watchdogs which ensure it adopts sound reporting

standards and other best practice benchmarks which ensure it maintains its position as one of the

largest companies in the United States of America. The other rationale of investing in CVS

Caremark Corporation is that this company is publicly quoted in one or more of the leading

securities exchange bourses in the United States of America. The company therefore abides by

the disclosure rules required of publicly quoted companies which include adhering to financial

reporting guidelines and corporate governance requirements. The company therefore has sound

management practices and qualified management personnel which will protect my investor’s

investment in the company and ensure it grows over time.

The other reason as to why this is the best investment vehicle for my prudent investor is that

CVS Caremark has built a formidable distribution network that enables it to reach its customers

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effectively and with minimal effort and expense. The company currently has over seven

thousand four hundred and fifty eight stores located in all the states in the United States of

America. The company was founded in 2007 through a merger of the two companies of

Caremark and CVS Pharmacy which originated the name CVS Caremark Corporation; a merger

that was approved by the shareholders of both companies. The company is involved in

community initiatives where CVS/Pharmacy stores are located. The company through CVS

Caremark Charitable Trust is involved in education and health care activities in the

communities it operates in (Biotech Business Week, 2007). The company through CVS

Samaritan Vans provides free roadside assistance to motorists in many cities throughout the

United States of America. These vans are essentially “emergency response vehicles" which

patrol select major freeways to assist motorists caught in compromising situations. These vans

are manned by drivers who possess various skills, certifications and talents. Most of them are

competent and certified in auto mechanics, others are medical technicians who are certified to

undertake emergency medical operations while others are certified animal controllers whereas

others are paramedics registered by their certification bodies (Hayden, 2009). These vans which

are operated and financed by CVS Caremark travel over nine hundred and seventy thousand

kilometers and assist over sixty one thousand accident victims. The company is a major

employer and supported over two hundred and three thousand jobs in the United States of

America in 2012. These numbers have continued to rise each year. The company provides a

source of livelihood to thousands of Americans who would otherwise be jobless and relying on

state welfare programs to survive. By investing in this company the investor will be boosting a

company which a good corporate citizen and one that helps solve society’s problems.

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The company has also excelled in mergers and acquisitions and is also a leader in

innovations. Since the 1990’s the company has grown its business through acquisitions such as

the Peoples Drug which was acquired and brought into the company’s fold about five hundred

stores. The company is also innovative and creative. For example it launched Pharmcare in 1994;

a benefit management company which excelled in providing various services to managed care

companies, insurance firms, and government entities (CSRwire, 2013). The company also

bought Revco drug stores which had a total of two thousand six hundred stores and which

boosted its store numbers in 1997. Other notable acquisitions include Arbor Drugs which added

about 207 stores into its fold which gave the company an instant lead in Detroit which is a highly

competitive market. The company also acquired Soma.com, the first online pharmacy and

changed its name to CVS.com which enabled the company to offer a fully integrated online

pharmacy to consumers (CSRwire, 2013). The company also bought Stadtlander pharmacy

which enabled the company to be the largest specialty pharmacy in the country. The company

has also grown its store numbers through accelerated opening of new stores in Chicago. The

company also acquired Longs Drugs, Rite Aid and Walgreen companies which enabled it to

grow its store numbers in an exponential manner. By acquiring stocks in CVS Caremark

Corporation the investor will own a company that is not only growing but has built a reputation

of enhancing its competitive advantage through acquisitions and creativity. The company

acquired freestanding drug store operations in Albertsons supermarket chain to grow its

distribution channels in 2006. This enabled the company to bring into its fold under Osco Drug

and Sav-on Drugs banners over seven hundred stores. This enabled the company to dominate the

southwestern and Midwest United States since most stores are located there.

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Profile of the investor for which this company may be a fit, relative to his potential investment

strategy

CVS Caremark Corporation’s investment products are ideal for a medium and long term

investor. CVS Caremark Corporation’s investment products are not ideal for short term

investors. Short term investment is for a period of between one to three years. The reason is that

CVS Caremark Corporation stocks, bonds and other investment products do not change that fast

in the market. Since the company is a leader in its industry its stock prices are likely to plateau at

some level and change marginally. The only time when prices can change drastically is after the

company announces a major acquisition, merger or invention. An announcement by leading

competitors to the effect that they have introduced a new more advanced product may not

adversely impact on the market prices of CVS Caremark Corporation. This is because the

company is a leader and it would be difficult for any single competitor to outwit them in the

market. The company has built extensive switching costs due to its leadership position which

keeps a large part of its market in its fold. The most ideal investor in CVS Caremark Corporation

investment vehicles is a medium and long term investor. A medium term investor is one who is

willing to invest for a period of between four years to nine years. This type of investor has

confidence in the company’s ability to acquire competing firms or innovate and come up with

top of the range products which are able to enable it achieve competitive advantage. The long

term investor is perhaps the most ideal because he believes in the long term viability of the

company. This is an investor willing to risk his money for an extended period of time exceeding

ten years. This type of investor is able to hold on to his investment when the prices fall due to

competitive pressures from leading competitors and foreign industry entrants. A long term

investor will benefit in the long run because CVS Caremark Corporation is a leader in

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innovation and acquisition and sooner than later will come up with cutting edge products that are

able to propel its products back to the top in the event of a threat from a new entrant.

Financial ratios to measure the company’s financial health

According to Alrafadi & Md-Yusuf (2011), financial ratios are used to evaluate the

financial health of a company. Financial ratios are also used to establish trend performance of a

company over time. Through financial ratio analysis a company can take corrective measures to

remedy a deteriorating situation. For example if net profit margin ratio declines in several

comparative years a company can take corrective measures to address the root cause of the

decline (Najjar, 2013). Several financial ratios are used to measure the financial health of a

company. These ratios can be categorized in several classes.

The first set of ratios measures profitability of a company and are generally referred to as

profitability ratios. These ratios include net profit margin, gross profit margin, return on assets,

return on equity, return on investment, EIBITDA margin, revenue per employee and calculated

tax rate. Net profit margin is derived by net profit divided by total revenues multiplied by one

hundred whereas gross profit margin is derived by dividing gross profit by the revenues earned

in a year multiplied by one hundred. Return on assets is obtained by dividing net profit by

average total assets. This ratio measures the rate of contribution of assets into the profitability of

a company. Return on equity is obtained by dividing net income by average common stock and it

measures how much the company is making for its stock holders. The ratio EBITDA margin is

obtained by dividing EBITDA by the total revenues multiplied by one hundred. This measures

the company’s performance and enables the managers to take corrective measures in the event

the company’s performance is deteriorating. The profitability ratios are provided in the excel

sheet attached for the financial years 2008, 2009, 2010, 2011 and 2012.

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The other set of ratios that measures the financial health of CVS Caremark Corporation

are liquidity ratios. The most commonly used liquidity ratios include quick ratio, current ratio

and net current assets as a percentage of total assets. Quick ratio measures the ability of a firm to

meet its current liabilities without relying on inventories. Current ratio measures the ability of a

firm to pay its current liabilities using its current assets. In the event the current assets exceed the

current liabilities the company is said to be technically insolvent. Debt management ratios also

measure the financial health of a company and these include long term debt to equity ratio, total

debt to equity ratio and interest coverage ratio. Long term debt to equity ratio is obtained by

dividing long term debt by the total shareholders’ equity. This ratio measures the ownership

structure of a company. Total debt to equity ratio is obtained by dividing total debt by total

equity. This ratio also measures the ownership structure of a company. A company whose

ownership leans more towards debenture holders is at risk of being put into receivership by the

creditors. These ratios are attached in the Ms Excel spread sheet attached to this report. The other

set of ratios include asset management ratios. These ratios include total asset turnover,

receivables turnover, inventory turnover, accounts payable turnover, accrued assets turnover,

property, plant and equipment turnover and cash equivalents turnover. Total asset turnover ratio

measures the rate at which the company’s assets are contributing to the revenues of the company.

Through this ratio the management can appraise the performance of its managers and take

corrective measures where need be. Receivables turnover measures the rate at which the

company is collecting its debtors. This ratio determines the cash levels of a company since if a

company is unable to collect receivables on time it is likely to suffer cash flow constraints to

meet its daily activities. This will impact on the performance of the company. Inventory turnover

ratio measures the company’s ability to manage its inventories. If the company holds excess

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inventory then it ties cash that can be better deployed to generate more revenue. Accounts

payable turnover on the other hand determines the rate at which the company pays its creditors.

This ratio is important because it determines the liquidity levels of the company. The cash cycle

will be determined by how the company manages this ratio. All these asset management ratios

measure the financial health of a company (Fair Disclosure Wire, 2008). Please refer to the

attached spread sheets for the ratio analysis of CVS Caremark for the periods 2008 to 2012.

Risk analysis and mitigating strategies for CVS Caremark Corporation

CVS Caremark Corporation faces various risks which threaten its business

viability and sustainability. These risks include market risk. This is the risk that the company’s

products will lose their appeal in the market thus leading to a drastic fall in market share and

revenues. The company can mitigate this risk by creating a robust research and development

function. This department will study the market to establish shifting customer tastes and

preferences on time. The company will therefore develop drugs that anticipate these shifts and

thus forestall any unforeseen and unexpected drop in revenues. The research department will also

study the existing operations to ensure the firms operations are lean synchronized to ensure

efficiency in customer service, removal of any wastage and cut costs. This will ensure the

company stays ahead of the competitors. This department will also advise on the most ideal

strategic options for each market segment. There are mainly three competitive strategies that the

company can adopt. These include cost cutting, focus strategy and differentiation strategy. These

strategic options have profound impact on the corporation’s operations and staff numbers.

Without a robust research department the company may not be able to mitigate the risk of a

drastic fall in market share (CSRwire, 2013).

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The second risk that the company faces is financing risks. The company faces the risk of

being unable to attract adequate funding to finance its expansion strategies. This is because the

company has been growing exponentially and financiers may fear that this expansion bubble will

burst in future leading to loss of their funds. The company can mitigate this by preparing

financial statements on time and as transparently as possible. The company can also abide by all

the accounting reporting standards in use in the United States of America. This will ensure that

financiers do not lose confidence in the company. These financial reports will assist the company

to attract and win the confidence of new financiers while at the same time maintain the trust of

the former financiers. The company can also employ competent accounting officers who will

maintain integrity in reporting. The company can also mitigate this risk by using renowned and

reputable international auditing firms to audit its books. This will further boost the confidence of

financiers in the company (CSRwire, 2013).

The other risk is operation risk. This is the risk that the company will not be able to

operate its business efficiently leading to poor customer service and lose of market share. Since

the company currently operate well over seven thousand stores in the United States of America,

and continues to expand this poses the risk that the company will be too large to manage its

operations well. There is the risk that the operations will be too large that the company will lose

its stocks through pilferage or carelessness, there will be wastage through the systems and the

company will be unable ensure its large staff establishment remains motivated. The company can

mitigate this risk by employing chief operating officers who have a reputation of managing large

stores profitably. Another strategy is using top of the range information technology products that

ensure online management of operations. Through effective decentralization and delegation the

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company can manage staff affairs effectively thus ensuring staff morale is kept at its bets

(CSRwire, 2013).

The other risk that the company faces is the risk of inflation and foreign exchange

fluctuation. In the event that the company products contain a large foreign content the risk of

foreign exchange loss is real. The company faces this risk in that the foreign exchange rate can

rise too fast thus making their products expensive in the market compared to competitor

products. The company can end up losing market share and loss of revenue as sales drop due to

price increases. To mitigate the risk of inflation the company can mitigate this by holding

adequate products in stock rather than cash. The company can also use hedging strategies of

futures and forwards to mitigate the threat posed by adverse unexpected change in foreign

exchange. The other risk is loss of assets through fire and burglary. The company can mitigate

this risk by taking appropriate insurance covers that mitigate this risk. In the event the company

suffers loss due to unanticipated fire incidents then insurance companies can reimburse the

company for the los and restore it to its former state.

The other major risk is the risk of terrorism. Terrorism can cause irreparable damage to

the company operations especially if it affects its stores. Customers will stay away due to fear of

death from terrorist activities and the company will be unable to sell. The company can mitigate

this by collaborating with the national policing agencies to detect and neutralize terrorists. The

company can also hire its own armed guards to man its stores and neutralize terrorist elements

who may pose threat to its customers.

Recommendations of CV Caremark Corporation’s stock as an investment opportunity

The company’s stock is a worthwhile investment option. First the analysis contained in

the attached Ms Excel spread sheet shows that the company cash flow per share grew by a

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whopping 91.58% from the year 2008 to 2012. This is a very impressive performance and it

implies that the company has been paying continuous dividends over the duration. An investor

holding this stock is assured of yearly dividends from his stock holding. The company stock

price is also likely to maintain an upward trend (PR Newswire, 2011). The investor is assured of

benefiting from capital appreciation by holding this stock. The company book value per share

grew by 27.47% in the periods 2008 to 2012. This is also a phenomenal growth. This shows that

the company asset base has never fallen due to erosion of asset value from accumulated

depreciation. The company has been making meaningful additions over the years to its asset

base. This shows that the management is committed to growing the company’s asset base.

Taking this as the trend we can deduce that the investor will benefit from capital appreciation of

his stock over time. The company has been paying dividends regularly and this will ensure the

investor has a stream of revenue that is assured to a relative degree (PR Newswire, 2013).

References

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balanced scorecard. American Journal of Economics and Business Administration, 3(4),

618-622. Retrieved from http://search.proquest.com/docview/1325014751?accountid=45049

Boyle, D. J., C.F.A. (2009, 04). CVS caremark corporation. Better Investing, 58, 29. Retrieved

from http://search.proquest.com/docview/233332736?accountid=45049.

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Caremark shareholders approve CVS merger. (2007, Mar 16). Business Wire. Retrieved from

http://search.proquest.com/docview/445071454?accountid=45049.

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Lofberg, P., & McCrossan, T. (2010). Editor's inbox: CVS caremark takes issue with EBN

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