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An Insider Buys $300K Of CVS Caremark Corporation (CVS), Should Investors Follow?

 October 08, 2012 06:41 PM

(By Rich Bieglmeier) Insiders were on vacation or tight with their dinero last week. Insider activity was super-slow last week. iStock only found two buys of interest, LiveDeal, Inc. (LIVE) and CVSCaremark Corporation (CVS). LIVE looks like a short to us; so, CVS is the only game in town, in our view.

Last week, EVP & General Counsel, Thomas Moriarty bought 6,164 shares at $48.67, for an investment of $300,002. The purchase is more interesting in light of how close the price paid is to CVS's 52-week, intraday high of $49.23.

Moriarty was named Executive Vice President and General Counsel of CVS Caremark on Sept. 17, 2012. Despite his short stint with the company, he felt confident enough to chalk up $300 large, at a 52-week high. Did we mention that already?

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According to iStock's take on the chart, Mr. Moriarty might have been better off waiting a couple of days or weeks. The stock looks heavy at the top and appears to be rounding back to minor support at $38. There is a more robust firewall between $46 and $43.

Relative to its industry, CVS Caremark is fairly priced. The average P/E for the peer group is 17.46, while the drug store chain trades at 17.39 time earnings. CVS's is valued at 53 cents for every dollar in revenue per share, and the industry for 45 cents. However, its growth

For 2013, Wall Street is projecting $3.79, up 12.50% from 2012. Meanwhile, CVS has a forward P/E of 12.85. By this metric, CVS offers very little room for price-to-earnings expansion.  If anything, iStock would be surprised to see the company's multiple contract as sales growth is expected to slow to 4.2% in the year ahead, down from 14.70% in 2012.

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Slowing sales could open the door to downside earnings surprises, something that has only occurred once in the last 16 quarterly checkups. However, the recipe is in place for at least one disappointing quarter in the next year as CVS' cost of revenues (COR) has increased as a percentage of revenue, and as compared to the first three and six months of 2011.

For the first half of 2011, CORs consumed 81.1% of revenue. In the quarter ended June 30, 2011, the number was 80.7%. For 2012, the percentages are 83% and 82.2%, respectively. Rising costs and slowing sales could put the clamp on earnings, especially if the economy continues to cool.

Overall, iStock feels the potential risk to earnings, and current valuations make CVS Caremark Corporation (CVS) too pricey in our view. We'd find the stock more attractive at $39ish than Thomas Moriarty's buy at $48.67.



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