DANIEL GENTER
PRESIDENT AND CEO
RNC GENTER CAPITAL MANAGEMENT

COMPANY: CVS Corporation
TICKER: CVS (NYSE)
PRICE: $28.32
52 WEEK RANGE: $23.89-$31.89
MARKET CAPITALIZATION: $23.18 billion

Daniel Genter is the president and CEO of RNC Genter Capital Management. Mr. Genter spoke with Katharine Herrup of The New York Sun about why CVS is already big on the East Coast and how it will expand to become the biggest drugstore chain on the West Coast.

Why do you like the stock?

From an overall demographic standpoint, we think the health care area is very strong. There is a push to use pharmaceuticals because hospitals are being very aggressive in reducing the average stay. The first several days is when hospitals make the most money, and they like to have you out in three days. There is also another macro trend pushing for the use of generic drugs, and CVS has their own line of these.

In addition, CVS is buying Sav-On, a drugstore chain on the West Coast, and this acquisition will make them the no.1 drugstore chain in America. The takeover of Sav-On – formerly owned by the supermarket chain, Albertsons – should be completed by the end of 2006.

CVS is a good brand and will continue to capture market share. Sav-On was not growing because it was part of a grocery store, but CVS is much more focused.

What separates CVS from the other drugstore chains?

CVS is planning to put in their own beauty adviser programs with their own experts to help sell high-end beauty products. They hope to implement this program in 400 of their stores by the end of 2006.The aim of the program is to draw more customers in they will buy packages of beauty products instead of one product. CVS is describing it as a “store within a store.”

CVS fills 14% of all prescriptions nationwide. Also, CVS’s private line of drugs will grow at 18-20% a year, and they have a prescription mail-order subsidiary business called Pharma-Care, which is doing well.

CVS is also doing a lot in digital photo sales, which could reach 35% of the total photo-processing sales of CVS. Back in 2003, digital sales represented only 2% of their overall photo sales. It shows the market is changing. Their photo department is just another factor that will bring people into the store.

Where is CVS’s presence strongest in America?

It’s very strong on the East Coast, especially in the Southeast. CVS started in the Southeast in 1963 for health and beauty aides. They have since grown organically through the acquisitions they’ve made. They’ve been weak in the West, which is what they’re trying to accelerate with by buying Sav-On. They’re probably going to be the strongest chain out there after this deal is done, at least in Los Angeles. CVS bought Eckerd pharmacy a while back so acquisitions are not new for them.

What is the forecast for CVS in the next 12 months or so?

For CVS the earnings will be up 16% a year for the next 3-5 years. Right now 57% of their drug sales is generic and will increase to 65% over the next 2-3 years. Their prescription sales will be up 50-60% over that same time. Total earnings for this year will be up 12% and will accelerate to 19% in 2007.

Who does CVS compete with?

Maybe Walgreens on the East Coast, but Walgreens is trying to compete with Kmart by expanding their product line. CVS will move in that direction in time, but they will remain a purist to the health and beauty industry.

What do you think the stock is worth? Do you expect its value to increase?

We think it has a solid valuation at $35, and we take it fully valued at $42. It’s had a steady climb already this year.

Is it a good time to buy?

We like where it is. Although it has pulled back a little bit in the past couple of weeks, I think it’s at a good buying spot.

What are the risks?

If they don’t do as well with the acquisition of the Sav-On. If consumers stop spending on drugs. If people buy online or bring in drugs from Canada or Mexico.