CVS Caremark stock appears undervalued - Barron's

NEW YORK, Aug 23 (Reuters) - CVS Caremark Corp (CVS.N) appears undervalued relative to rivals as its drug stores turn in strong results and its pharmacy benefit management business shows hints of improvement, Barron's said in its Aug 24 edition.

The newspaper said shares of the largest U.S. retail pharmacy chain, which closed Friday at $35.72, could trade in the 40s if they were valued like rivals such as drug retailer Walgreen Co (WAG.N) and pharmacy benefit managers Medco Health Solutions Inc (MHS.N) and Express Scripts Inc (ESRX.O).

Created in a $26.5 billion merger in 2007, CVS Caremark has been dragged down by the Caremark side of the business, which contracts with corporations, governments, unions and others to run the prescription drug portions of their health plans, the newspaper said.

CVS has lost some big contracts in recent years, its operating margin is declining, and it is not expected to add market share soon, the newspaper said. In contrast, it said Medco is posting double-digit operating profit growth because it added more new business and discounted its services less.

Barron's, citing an analyst, nevertheless said margins could improve in 2010 as discounting pressures subside and as revenue from multi-year contracts increases.

It also said the Woonsocket, Rhode Island-based company could benefit from increased use of generic drugs, especially as patents expire for blockbuster drugs such as Pfizer Inc's (PFE.N) cholesterol treatment Lipitor and Bristol-Myers Squibb Co's (BMY.N) anti-blood clotting medication Plavix.

Meanwhile, the newspaper said results at CVS' 6,900 retail stores appear strong, including a 6.1 percent increase in same-store sales during the second quarter.

CVS shares closed Friday at $35.72 on the New York Stock Exchange, or 12.1 times expected 2010 profit of $2.95 per share, according to Reuters Estimates.

Walgreen has a 14.1 multiple, while Medco and Express Scripts have respective 17 and 16 multiples, Reuters Estimates said. (Reporting by Jonathan Stempel; editing by Gunna Dickson)