Fitch Affirms CVS Caremark at 'BBB+'; Outlook Stable
NEW YORK -- December 18, 2012
Fitch Ratings has affirmed its ratings on CVS Caremark Corp. (NYSE: CVS),
including the long-term Issuer Default Rating (IDR) at 'BBB+'. The Rating
Outlook is Stable. CVS had $10.8 billion in debt outstanding at Sept. 30,
2012. A full rating list is provided at the end of this release.
The affirmations reflect the company's relatively steady credit metrics and
strong liquidity position. Fitch expects CVS to manage its credit profile and
capital allocation within the context of maintaining its publicly stated
adjusted debt/EBITDA (including NPV of lease obligations) ratio of 2.7 times
(x). The ratings also consider CVS's strong positioning in all prescription
distribution channels, with a #2 market position in the retail segment and
pharmacy benefit management (PBM) and a #1 position in the fast-growing
specialty pharmacy business, making it the largest provider of prescriptions
in the U.S. with a 21% share of 2011 prescription volume.
The company is well positioned to drive continued market share gains and
capitalize on favorable industry trends for prescription growth such as the
aging population and expansion of coverage to the uninsured, the continued
growth in higher-margin generics and mid-teens growth in specialty pharmacy
over the next five years. Of concern are the ongoing cyclical pressures on the
industry, the industry-wide pressure on pharmacy pricing and reimbursement
rates in both the retail and PBM businesses, and any potential hit to
profitability from regulatory issues. Ongoing healthcare reform initiatives
could pressure reimbursement rates but be positive for prescription volume
over the intermediate term if a prescription plan is put in place for the
Retail EBIT Growth Expected To Be In The 8%-9% Range Between 2011-2014:
The retail segment which accounts for approximately 70% of operating profit
continues to perform well in spite of near-term cyclical pressures and the
company continues to lead the drug retail sector in sales productivity and
other operating metrics. It has had a successful track record in integrating
large-scale retail acquisitions over the past 10 years, while maintaining a
healthy level of growth and improving profitability on an organic basis.
As large-scale retail acquisition opportunities are limited going forward,
share gains will depend on: generating above-average organic growth; store
closings or share losses by weaker independents and regional chains; and small
market fill-in acquisitions and prescription file buys. Fitch expects retail
top-line growth to be in the 3%-4% range going forward with comparable store
sales growth in the 1.5%-2% range (excluding the benefit from gaining scripts
from Walgreen this year) and square footage contribution in the 1%-1.5% range.
Operating profit growth is expected to be 14% in 2012 and around 6% in
2013-2014, with continued pharmacy pricing and reimbursement pressures offset
by a robust generic pipeline, continued improvement at acquired units, and
expense leverage on higher volume. Retail EBIT margins are expected to
increase by 30-35 basis points (bps) annually over the next two years on an
expected base of 8.9% in 2012.
PBM Business Operating Profit Margin Expected To Expand In 2013 After Four
Years Of Decline:
CVS has seen positive momentum in its PBM segment since 2011 from a top line
perspective with strong business wins that were accretive in 2012, including
the ramp up of Aetna and the UAM acquisition which contributed $5.5 billion in
incremental revenue in 2012. The company has won $24 billion of net new
business over the past three years. Revenues have grown in the mid-20% range
in 2011-2012 and are expected to grow in the low single digit range going
The company should finally be able to realize margin expansion in 2013 and
beyond in this business segment from a 2012 expected level of 3.6% as the
company integrates large scale contracts such as Aetna Inc. The company should
also begin to realize benefits from the streamlining initiatives that it put
in place in late 2009 to deliver over $1 billion in cost savings from
2011-2015, with benefits outweighing costs in 2012.
Overall EBIT Growth Of 9%-10% expected in 2013; Strong FCF Continues:
Fitch expects total EBIT growth including retail to be in the 9%-10% range for
2013, after growing 14%-15% in 2012. CVS continues to generate strong free
cash flow (FCF) providing the company with strong financial flexibility. Fitch
expects $3 billion to $3.2 billion in annual FCF (after dividends and before
any sales leaseback transactions) over the next few years. Fitch expects
excess cash flow after capital expenditures will primarily be used toward
increased dividends, share buybacks, and any bolt-on acquisitions within the
context of maintaining adjusted debt/EBITDAR at 2.7x. The company's liquidity
is also supported by various credit facilities that support its $3.5 billion
commercial paper program.
The company has debt maturities of $550 million each in 2014 and 2015 and $700
million in 2016. CVS recently issued $1.25 billion of 2.75% senior notes due
2022 and is currently conducting a tender offer to buy up to $1,325 million of
its 2016, 2017 and 2019 debt maturities which total $3.45 billion.
WHAT COULD TRIGGER A RATING ACTION
Positive: Continued strong operating momentum combined with a sustained
reduction in lease-adjusted leverage to the low-2x area could lead to a
positive rating action.
Negative: Shareholder-friendly actions that push adjusted leverage to 3.0x or
above for an extended period could lead to a negative rating action.
Fitch has affirmed CVS's ratings as follows:
--Long-Term Issuer Default Rating (IDR) at 'BBB+';
--Senior unsecured bank facility at 'BBB+';
--Senior unsecured notes at 'BBB+';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'. The issuer did
not participate in the rating process other than through the medium of its
public disclosure. The ratings above were unsolicited and have been provided
by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Short-Term Ratings Criteria for Non-Financial Corporates' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Short-Term Ratings Criteria for Non-Financial Corporates
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Monica Aggarwal, CFA, +1-212-908-0282
One State Street Plaza
New York, NY 10004
Phil Zahn, CFA, +1-312-606-2336
Megan Neuburger, +1-212-908-0501
Brian Bertsch, New York, +1-212-908-0549
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