CVS Caremark
Price $38.80 (5/30)
52 Week Price Range- $26.84-39.50
Market Capitalization- 52.54 B
Dividend Yield- 0.50 (1.3%)
Diluted Shares- 1,377 M
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Consumer Staples- Stock Presentation
Industry Trend: Generic Drugs
 Consumer preference in recent years has been towards
generic drugs.
 CVS Caremark stands to benefit more from this in that CVS
maintains a higher percentage of reimbursement for generic
drugs from Medicare than Walgreens
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Consumer Staples- Stock Presentation
Health Care Reform
 The Affordable Health Care Act is projected to expand
insurance to 32 million Americans previously without
coverage
 Should also fill in the gap in Medicare Part D Coverage
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Consumer Staples- Stock Presentation
Demographic Analysis
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Consumer Staples- Stock Presentation
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Consumer Staples- Stock Presentation
Multiples
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Consumer Staples- Stock Presentation
CVS Caremark
 Weight DCF 75% and Multiples 25%
 0.75*42.03+0.25*40.31= $41.60
 Upside 8.5%
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Consumer Staples- Stock Presentation
Wal-Mart Stores, Inc.
Walmart
International
Walmart U.S.
 Total Sales
$260.3B
 Represents 62%
of total revenue
 Total Sales $109.2B
 Represents 26% of
total revenue
 Grew 10.8% yr/yr
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Consumer Staples- Stock Presentation
Sam’s Club
• Total Sales $49.5B
•
Membership only
•
Grew 3.4% yr/yr
Recommendation
SELL 50 bps
U.S. comparable store sales continue to disappoint
 Have witnessed seven straight quarters of decline
U.S.
Comp
Sales
2011
2010
2009
2008
2007
-0.6%
-0.8%
3.5%
1.6%
2.0%
 Diverted from EDLP theme in late „09
 Time recovery
 Cut assortment/inventory
 Re-implementation in late 2010
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Consumer Staples- Stock Presentation
Recommendation
SELL 50 bps
Food inflation tradeoff: Margins or Consumer ?
 Groceries 54% of sales last year
 Entertainment next in line: 12%
 Since June 2010 Goldman Sachs Commodity Agriculture & Livestock
index up 60%
 Relatively strong gross margin ~25%
 Margins will be negatively effected
 Prices starting to rise abroad
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Consumer Staples- Stock Presentation
Philip Morris Profile
 Growth in the emerging markets and dominant market share in




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cigarette products
Stable sources of tobacco means no increase in input costs, even as
other commodities rise
High dividend yield is great in times of uncertainty
Sales overseas means earnings are in several foreign currencies making
Philip Morris a great hedge against the weakening dollar
Worldwide cigarette growth has not been limited by litigation and
anti-smoking campaigns
Consumer Staples- Stock Presentation
Breakdown of industry sales
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Consumer Staples- Stock Presentation
Non-OECD Market
70%
PM's Premium Cigarette Market Share
60%
50%
40%
30%
20%
10%
0%
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Consumer Staples- Stock Presentation
2007
2010
OECD Market
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Consumer Staples- Stock Presentation
Worldwide Cigarette Sales
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Consumer Staples- Stock Presentation
Competition
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Consumer Staples- Stock Presentation
Efficiency
25
180
160
20
140
120
15
100
80
10
60
40
5
20
0
0
PM
17
MO
Consumer Staples- Stock Presentation
BTI
RAI
ROA
ROE
Competitive Advantages
 Superior Brand Portfolio
 Marlboro represents 9.1% of international cigarette market
 Many local brands such as Samppoerna A in Indonesia which has a
11.7% market share in the country
 Strong Pricing Power
 Addictive product, strong brand loyalty
 High barriers of entry
 “The single most important decision in evaluating a business is pricing
power.” –Warren Buffet
 Great Efficiency and Management of Cash Flows
 Much higher ROE and ROA than competitors
 Highly leveraged (3.05 debt to equity), but high interest coverage
ratio (12.78)
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Consumer Staples- Stock Presentation
Commodities
8.5
Monthly Prices $/bu
7.5
6.5
5.5
4.5
Corn
3.5
Wheat
2.5
Jan-09
19
Jul-09
Consumer Staples- Stock Presentation
Jan-10
Jul-10
Jan-11
Dividend Yield
 Paid $2.50/share over the past 4 quarters
 Dividend Yield of 3.68%
 Average industry yield is 6%
 Other factors are important: payout ratio
 Harley and Dow Chemical
 Dividend increases
 10%, 7%, 17% increases in 2010, 2009, 2008
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Consumer Staples- Stock Presentation
Weakening US Dollar
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Consumer Staples- Stock Presentation
Lawsuits/Government Regulation
 Sudden increases in tax in Japan, Australia, Greece
 Plain packaging
 Philip Morris has adapted well to many restrictions/regulations in
the past
 Inelastic demand
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Consumer Staples- Stock Presentation
Risks
 Because of the high operating margins, it is possible that a
pricing war will occur between the major players in the
tobacco industry
 Organic cigarette volume has been slipping for the past few
quarters and it is unsure whether that trend will continue
 If taxes increase heavily and input costs rise, it will be hard to
pass on the price increases to the consumer
 US dollar strengthening could lead to lower earnings
23
Consumer Staples- Stock Presentation
Segmented Growth Rate
pg 120 of 10-k
(millions)
SALES GROWTH
European Union
Eastern Europe, Middle East & Africa
Asia
Latin America & Canada
Total company sales growth
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Consumer Staples- Stock Presentation
FY
2013E
-0.5%
10.5%
15.5%
15.5%
8.7%
FY
2012E
0.5%
11.5%
16.5%
11.5%
8.6%
FY
2011E
0.5%
13.0%
23.0%
18.0%
10.7%
FY
2010
-1.8%
14.9%
22.7%
17.2%
9.1%
FY
2009
-5.7%
-6.4%
1.6%
14.5%
-2.5%
FY
2008
12.8%
21.8%
10.1%
23.0%
15.2%
FY
2007
13.0%
21.5%
9.4%
16.9%
14.4%
FY
2006
Analyst: Xuan Li
Terminal Discount Rate:
Terminal FCF Growth:
4/18/2011
Ye a r
2011E
Revenue
74,958
% Grow th
2012E
81,414
8.6%
Operating Income
12,334
Operating Margin
16.5%
Interest and Other
967
Interest % of Sales
1.3%
Taxes
3,191
Tax Rate
13,264
16.3%
1,050
1.3%
3,456
2013E
88,497
8.7%
14,448
16.3%
1,142
1.3%
3,792
2014E
89,382
1.0%
14,748
16.5%
1,153
1.3%
3,875
9.00%
2.50%
2015E
91,170
2.0%
14,587
16.0%
1,176
1.3%
3,822
2016E
92,993
2.0%
14,879
16.0%
1,200
1.3%
3,899
2017E
94,853
2.0%
15,176
16.0%
1,224
1.3%
3,977
2018E
97,224
2.5%
15,070
15.5%
1,254
1.3%
3,937
2019E
99,655
2.5%
15,446
15.5%
1,286
1.3%
4,036
2020E
102,146
2.5%
15,833
15.5%
1,318
1.3%
4,137
2021E
104,700
2.5%
16,228
15.5%
1,351
1.3%
4,240
28.1%
28.3%
28.5%
28.5%
28.5%
28.5%
28.5%
28.5%
28.5%
28.5%
28.5%
Minority Interest
265
287
312
315
322
328
335
343
352
361
370
Interest % of Sales
0.4%
0.4%
0.4%
0.4%
0.4%
0.4%
0.4%
0.4%
0.4%
0.4%
0.4%
Net Income
7,911
% Grow th
8,470
7.1%
Add Depreciation/Amort
992
% of Sales
Plus/(minus) Changes WC
% of Sales
1,020
9,202
8.6%
1,115
-1.5%
1,368
9,452
2.0%
1,395
9,641
2.0%
1,423
9,535
-1.1%
1,458
9,773
2.5%
1,495
10,018
2.5%
1,532
10,268
2.5%
1,570
1.3%
1.5%
1.5%
1.5%
1.5%
1.5%
1.5%
1.5%
1.5%
(1,802)
(1,547)
(2,355)
(1,073)
(912)
(837)
(759)
(681)
(698)
(715)
(733)
-1.9%
-2.7%
850
790
750
Capex % of sales
1.1%
1.0%
0.8%
6,251
% Grow th
7,152
14.4%
NPV of Cash Flow s
74,220
NPV of terminal value
82,765
90%
156,985
137%
Free Cash Flow Yield
1,341
9,267
1.3%
-2.4%
Projected Equity Value
2.2%
1.3%
Subtract Cap Ex
Free Cash Flow
9,405
7,212
0.8%
-1.2%
1,341
1.5%
8,332
15.5%
-1.0%
1,368
1.5%
8,355
0.3%
-0.9%
1,395
1.5%
8,616
3.1%
-0.8%
1,423
1.5%
8,883
3.1%
-0.7%
1,458
1.5%
8,854
-0.3%
-0.7%
1,495
1.5%
9,076
2.5%
-0.7%
1,532
1.5%
9,303
2.5%
-0.7%
1,570
1.5%
9,535
2.5%
47%
Terminal Value
4.89%
Free Cash Yield
105,947
9.00%
10-year
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
Shares Outstanding
16.2
15.1
13.9
19.8
18.5
17.1
10.5
9.8
9.0
12.7
11.8
10.8
1,842
Current Price
$
69.45
Implied equity value/share
$
85.23
Upside/(Dow nside) to DCF
22.7%
Debt
13,370
Cash
1,703
Cash/share
25
0.92
Consumer Staples- Stock Presentation
Expected return:
26.4%
Terminal P/E
10.3
Terminal EV/EBITDA
6.6
15.8
11.04
Conclusion
 Recommendation for Philip Morris is a BUY.
 Add 250 bps of Philip Morris to the portfolio
 Sell 50 bps of Walmart
 Hold CVS
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Consumer Staples- Stock Presentation