In our society, many people suffer from ailments and diseases that require medication to help them manage their illnesses while trying to maintain a normal lifestyle. Approximately 75% of the US population lives within three miles of a CVS (Datamonitor,2011), a retail pharmacy which sells prescription drugs and a range of general merchandise including over the counter drugs, beauty products and cosmetics, photo finishing, seasonal merchandise, greeting cards, and convenience foods (Mergent, 2012).
Pharmacy services for CVS also include a mail order pharmacy service, specialty pharmacy services, plan design and administration, formulary management and claims processing. CVS also possesses in store health clinics called MinuteClinics. In 2011, CVS employed approximately 211,000 people in 44 states, the District of Columbia and Puerto Rico. They have 7,025 retail stores, 569 MinuteClinic locations, 49 retail pharmacy stores, 18 mail order pharmacies, 6 mail service pharmacies, CVS.com and Caremark.com websites.
Their vision is to improve the quality of human life. They strive to provide expert care and innovative solutions in pharmacy and health care that are effective and easy for their customers. Their strength lies in establishing a strong presence in sectors such as specialty pharmacy and retail clinics. CVS was established in 1963 in Lowell, Massachusetts by brothers Stanley and Sidney Goldstein along with their partner Ralph Hoagland. CVS is short for Consumer Value Stores. In 1967, CVS opened its first store with a pharmacy department in Rhode Island.
During 1969, CVS is sold to Melville Corporation. CVS achieved $100 million in annual sales in 1974. In 1978 CVS sets itself apart from competitors by opening small healthcare and beauty aid stores in enclosed shopping malls. Becoming the 15th largest pharmacy chain in the United States in 1980, CVS possesses 408 stores. Stanley Goldstein, cofounder, takes over as chairman and CEO of Melville Corporation in 1987.
The next year, CVS celebrates its 25th Anniversary, with 750 operating stores. CVS acquired a mass majority of their stores from People Drug (500 stores), Eckerd (1,268 stores), Revco (2,500 stores), Arbor Drugs of Michigan (200 stores), Long Drugs (541 stores) and Sav-On and Osco drugstores from Albertson (700 stores). These acquisitions enabled CVS to end the year of 2005 as the largest pharmacy retailer in America, possessing more than 5400 locations.
Their headquarters is located in Woonsocket, Rhode Island. CVS became a part of the New York Stock Exchange in 1996 after restructuring their brand. Caremark was formed by Baxter Healthcare Corporation, a healthcare company that treated and housed centers for disease management such as the Hemophilia Patient Home Health Care and IGIV Home Care Services. Caremark decided to make pharmaceutical services its core operating unit in 1998.
Caremark Customer Care Centers are then opened and recognized extensively, creating their own success before they merged with CVS. In 2006 and 2008, they were recognized for customer satisfaction excellence by J.D. Power and Associates. They were best known for their mail service offerings and online prescription refills. CVS Caremark Rx, Inc and CVS Corporation completed their merge in 2007, which they then became CVS Caremark, the nation’s top pharmacy services provider.
The merger of CVS and Caremark has uniquely positioned the company to deliver significant benefits to health plan sponsors through effective cost management solutions and programs that engage plan members and promote healthier and more cost-effective behaviors. In addition, the merger has enhanced the ability to offer plan members and consumers expanded choice, greater access and more personalized services (Datamonitor, 2011).
There are many aspects of this company that set them apart from their competitors. The first one being their Extra Care loyalty card program, a card that you scan at checkout that offers discounts and keep track on your purchases throughout the year.
The MinuteClinic is their next entity that has brought them standalone success from stores like Walgreens, Freds, Walmart, and Rite Aid. MinuteClinic now stands as the nation’s largest walk-in medical clinic. The clinics treat common ailments, performs health screenings and the give vaccinations. The demand for walk-in clinics led to their quick growth which yielded over 500 stores in 2008. In this paper, I will give you a financial analysis of CVS Caremark for the years of 2009, 2010, and 2011.
I have given an overview of the corporation, now I will evaluate the company’s vulnerability to current financial threats and predict how trends will impact their financial performance in the future. I will analyze their financial statements, their stock and give a recommendation to improve their stock performance. The company’s ratio analysis will give information about their operation andfinancial condition. The stock analysis will show how the company continues to remain competitive after different financial threats.
Financial Threat & VulnerabilityAs I look over CVS’ financial statements, it is evident that they can withstand threats such as a recession. Net income is revenues less expenses, taxes, and preferred dividends (Brigham & Ehrhardt, 2011). We recently came out of a recession that lasted from 2007 to 2009 and their net income in 2009 ($2.55 Million) was higher than their net income in 2010 ($2.49 Million). As a matter of fact, CVS reported higher net income and higher same store sells on prescription drugs and other items at the end of 2009 versus the beginning of 2009 (Mergents, 2012).
It was even stated by one of their executives, that they were impacted by the recession but was resistant at the same time. During the recession, CVS’ sales only decreased by 4.92% while rival Walgreen’s sales suffered a plummeting 18%. These facts show that CVS can withstand any gloomy earning season. When compared to other companies in their same field, none of the other companies can generate as much net income as CVS.
They compete with other drugstore chains, supermarkets, discount retailers, independent pharmacies, membership clubs, internet companies, and retail health clinics, as well as other mail order pharmacies and Pharmacy Benefit Management (PBM) Companies. Walgreens is their top competitor and in 2011, they only grossed $2.71 Million while CVS grossed $3.46 Million.
Despite their fierce performance, CVS does face threats when being compared to their competitors. Intense competition threatens to have a negative impact on its profitability (Datamonitor, 2011) Competitors in the pharmacy benefit management arena include large PBM companies as well as many regional PBMs.
There are also many local and regional PBMs and large healthcare insurers with managed care plans. The PBM industry has been experiencing margin pressure as a result of competitiveness and increased client demands for lower prices, enhanced services offerings and higher service levels (Datamonitor, 2011). All of these companies offer some or all of the same services as CVS Caremark but offer pricing terms that CVS may not be willing to offer, which may affect their ability to stay the top performing company in pharmacy benefit management.
Financial TrendsAlthough companies may face many financial and environmental setbacks, CVS Caremark’s performance financially has remained above average.
A company’s financial performance can be evaluated by analyzing their financial trends and ratios. In 2009, 43.9% of CVS Caremark’s revenue came from pharmacy services, while 56.1% came from retail pharmacy services. 55% of CVS Caremark’s revenue came from retail pharmacy services and 45% from pharmacy services in 2010. Trends give clues as to whether a firm’s financial condition is likely to improve or companies, executives at CVS will need to frequently analyze their profitability ratios, which show the combined effects of liquidity, asset management, and debt on operating results (Brigham & Ehrhardt, p.98).
Profitability ratios will help CVS control expenses and evaluate their ability to stay competitive. Profitability ratios that are used are return on assets (ROA) and return on equity (ROE). This ratio tells the percentage of every dollar that is invested in the business returned to the company as profit. The ROA for 2009 was 6.03 %, 5.54 % for 2010, and 5.46 % for 2011. Factors that may reflect a low ROA are a company’s low earning power and high interest costs resulting from use of debt. To increase their return on assets, CVS needs to decrease their interest rates on their debt.
The ratio of net income to common equity equals the return on equity (ROE). This ratio tells how well stockholders are doing from an accounting perspective. CVS Caremark’s return on equity for 2009 was 10.51%, 9.33% for 2010, and 9.14% in 2011. To increase their ROE, CVS needs to make better use of their debt.
There is also a group of ratios called the Liquidity Ratios. Liquidity ratios determine the company’s ability to pay off its short term debts. CVS’s current ratio for 2009 was 1.43, 1.6 for 2010, and 1.56 for 2011. The current ratio is calculated by dividing current assets by current liabilities (Brigham & Ehrhardt, p.89).
The quick ratio, also referred to as the acid test is calculated by subtracting inventories from current assets and dividing it by current liabilities. To improve the liquidity ratios, CVS needs to pay down their bills and increase their sales which will increase their cash on hand. In 2009, CVS’ quick ratio was 0.53, in 2010 0.57, and in 2011 it was 0.62.
Based on the trends and ratios from 2009-2012, CVS needs to decrease their interest rates on their debt and make better use of debt. They also needs to pay down their short term bills, increase their sales, and reinvest their cash on hand so that it will bring those funds back into the corporation. In the future, if these changes are made, their profitability and liquidity will remain constant and increase instead of decreasing or fluctuating. Stock
Upon analyzing the stock of CVS from 2009 to 2011, it is evident that their stock prices did not change drastically from quarter to quarter. Investors that are seeking a consistent investment opportunity will profit from investing in CVS Caremark. From the fourth quarter of 2009, where stock was $32.21 per share, to the first quarter of 2010, where stock was $36.56 per share, CVS’ stock increased by 13.51 %.
From 2009 to 2010, CVS’ stock price increased by 7.95%, with a stock price per share increase of $2.56. From 2010 to 2011, their stock price increased by 12.07 % with a $6.01 per share increase (McGuire, 2012).
In the future, CVS’s stock will likely perform similar to the years of 2009 to 2011, unless they make some changes such as stock repurchase. In a stock repurchase, also known as share buyback, a firm that believe their stock in currently trading below its current intrinsic value or true value, will repurchase the undervalued shares, wait for the market to improve so that their share prices will increase to their true value and then resale them for a profit. If CVS does a stock repurchase, they will improve their stock performance drastically, while making more per share and selling more of their stock.
CVS Caremark is the largest pharmacy retailer in the nation. As a company, CVS is doing very well financially but can improve in some areas, which will generate an increase in their net income. I hope that this paper has successfully and efficiently evaluated the financials of CVS Caremark and gave a clear analysis of their performance.
ReferencesBrigham & Ehrhardt. (2011). Financial Management: Theory & Practice. Mason, Ohio: CengageLearningCVS Caremark (2009). Retrieved from http://www.cvs.comDatamonitor (2011). CVS Caremark Corporation. Company Profile. Retrieved fromhttp://www.datamonitor.comDatamonitor (2011). CVS Caremark Corporation. SWOT Analysis. Retrieved fromhttp://www.datamonitor.comMcGuire, Jason. CVS Caremark (NYSE CVS) Stock Prices. Retrieved fromhttp://www.stocknod.comMergent (2011) CVS Caremark Corporation. Retrieved fromhttp://www.mergentonline.com