CVS: In Good Health

Drugstore giant CVS says it fills one of every eight retail prescriptions in the U.S. And Edward Kelly, an analyst at Credit Suisse, says the chain is filling its own prescription for success by making smart acquisitions, generating solid sales growth and bolstering its competitive advantages. The investment firm added the stock to its "focus list" on Wednesday.

CVS, which generates 70% of sales from prescription drugs, should benefit enormously from an aging population and increasing use of pharmaceuticals. As the largest drugstore chain in the country by store count (more than 5,400 at last word), the Woonsocket, R.I., company is in a strong competitive position. Its sheer size and economies of scale should enable CVS to make life difficult for smaller rivals.

CVS has been expanding through acquisitions. The Eckerd stores it acquired in 2004 represent a significant -- and underappreciated -- opportunity to boost earnings, in Kelly's view. CVS agreed earlier this year to purchase about 700 Sav-on and Osco stores from Albertsons, boosting its presence in southern California. Both deals, Kelly says, contribute to a robust earnings outlook.

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In addition to operating the stores, CVS boasts a large pharmacy benefit management business. Businesses enlist PharmaCare to help provide drug coverage to insurance-plan participants. This subsidiary won a contract this week to provide mail-order, specialty-pharmacy and other services to certain employees of automaker DaimlerChrysler. Kelly says winning the contract is a defining moment for CVS because it bestows credibility on the benefit management business and sets the stage for additional wins.

The stock (symbol CVS) gained 4% on Wednesday. At $30, it trades at 19 times analysts' average earnings estimates for 2006 of $1.57 per share, according to Thomson First Call. That's an attractive price according to Kelly's analysis. He thinks the shares can rise to $35 over the next 12 months.

--Lisa Dixon