Hail To CVS/Caremark

Raising The Temperature
Deal or no deal, CVS was already a fave on Wall Street. And now that it has acquired Caremark Rx, No.2 in pharmacy-benefits management, Goldman Sachs (GS ), UBS (UBS ), and Matrix USA are even more bullish. CVS is the U.S. drug chain with the most outlets, and the combined company has been renamed CVS/Caremark (CVS). "We see the stock rallying not only for the long term but in the next two months as well," says Goldman's John Heinbockel, who upped his 12-month target for CVS, now at 33.98, from 39 to 43, with a buy rating. He also raised his 2008 earnings forecast by 15 cents, to $2.30 a share, and his 2009 estimate to $2.60. His 2007 estimate is unchanged, at $1.88. These figures are based on expected boosts in revenues from the merger: from $50 billion to $76 billion in 2007, from $54 billion to $91 billion in 2008, and from $58 billion to $99 billion in 2009. In 2006, CVS earned $1.56 a share on $43.8 billion. William Dreher of Deutsche Bank upgraded CVS to a buy even before the deal. He said he would raise his price target from 42 to 46 once the merger was O.K.'d. Ivan Feinseth of Matrix sees the current CVS 6.3% return on invested capital doubling in a year or two. "Operating profits will pick up," he says, "and cost savings will kick in." CVS completed the deal on Mar. 22 and paid $27.2 billion for Caremark, which contracts with outfits like employers or labor unions to manage their prescription drug plans. It earned $1.1 billion in 2006 on $36.7 billion.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By Gene G. Marcial

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