Player Avatar tekennedy (81.11) Submitted: 8/16/2010 4:17:22 PM : Outperform Start Price: $33.42 CVS Score: +8.31

Although the future of this company is relatiely uncertain I believe all roads lead to prosperity for current shareholders. The company is one of the newest experiments combining a Pharmacy Benefit Manager(PBM) with another link in the supply chain and I believe, if allowed to materialize, it would be beneficial for both customers and the company itself. PBMs serve their clients by lowering the cost of prescription drugs by increasing the use of generics and lowering the cost of distribution, often through a captive home delivery service. The PBM's combination with retail locations essentially allows these locations to become an extension of their existing distribution system, lowering unit costs and adding potential cross-selling opportunities(buying front of store convenence products). From the retail perspective this brings in incremental revenue and because this brings additional gross margin on top of existing expenses it will help raise ROIC and ROE and margins. From the PBM perspective it allows the company to offer additional services to the customers of their clients, such as pick up at CVS at the same price as home delivery; this may help increase market share and increase customer retention. Although PBM performance has been lack-luster since the combination, there is reason to believe that results will improve in the immediate future. As the industry standard is for a 3 year contract each client signed has signed since the merger, past losses may have been a result of the change. I believe this interrelationship has some aspects of a network effect: each CVS store added improves the benefit offered by the PBM due to more conveient locations, each extra client signed increases the number of customers coming to the stores and improving profitability and effciency.

For the negatives...
This is a relatively new experiment and could end up a number of ways. Government regulation could deem the company non-competitive resulting in a break up of the merger or requiring the PBM to act independently from the CVS stores. Another possibility is due to questionable leadership(currently exeriencng a CEO switch) the company is unable to take advantage of their structural benefits.

I believe, if the company were to be split, due to the current low valuation shareholders may even experience a rise in price in line with the current valuations of similar companies(although counterbalanced with lower profits due to lessened bargaining power with suppliers). Management of the company is my greatest concern. The previous president of retail operations is expected to be the new CEO so there is less likelihood of difficultes. Will his job be easy? No. But if he is able to competantly run the PBM business, decreasing customer defections, as well as profitably grow their store base shareholders will be well rewarded.

Member Avatar tekennedy (81.11) Submitted: 10/29/2010 11:04:21 AM
Recs: 0

Sold to generate cash (car died, not investment related)

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