Friday, September 16, 2005

Drug Addict: Coverage Initiated on CVS

Ever asked yourself: Should I own Walgreens (WAG) or Rite Aid (RAD)?

We certainly have, and we finally came up with an answer: "none of the above."

The drugstore chain you want to own here is CVS.

The recent Katrina-driven pulback in the stock has created what we believe is a wonderful buying opportunity.

CVS now owns more than 5,400 stores and it's an enterprise that's only going to get bigger.

The inclusion of revenues from the recently acquired Eckerd stores leaves CVS in good shape and well-equipped to benefit from continued growth in this industry.

While the fact that prescription drugs account for 80% of total CVS sales makes us a little edgy, we're going to kick off coverage with a Buy Rating.

The industry should experience strong growth as Baby Boomers enter their golden years and demand for prescription drugs rises.

The phalanx of generic drugs coming to market will boost CVS' numbers.

Then there's the expected acquisition synergies.

The key metric here is sales per square foot.

Sales per square foot of $356 for Eckerd stores vs. $834 in CVS -- if the integration goes smoothly, we think CVS' top line will show it.

We're expecting continued expansion of the company's store base, same store sales growth, and earnings acceleration over the next 12 months.

Plus, with CVS tucked away in your portfolio, you don't have to worry about what Greenspan and Co are going to do to interest rates.

One way or the other, people need their drugs.

And that means you need some CVS.

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