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CVS Caremark (NYSE: CVS) made major headlines last week by stating that it would no longer sell cigarettes at its stores.
Though important as that story was, the real issue that will determine the future value of the company is operating results.
On Tuesday before the market opened, CVS reported results that exceeded expectations. CVS stock made $1.12 per share in the fourth quarter, beating estimates by a penny per share. Revenues of $32.83 billion slightly beat estimates of $32.67 billion.
CVS also increased earnings guidance for the first quarter to a range of $1.03 to $1.06 per share. Analysts were looking for 98 cents per share.
It turns out discontinuing cigarette sales won’t have a negative impact CVS stock after all.
The socially conscientious move was a savvy PR move.
While the company is said to be forgoing $2 billion in sales, the decision will not necessarily be a negative on the top or bottom line of the company.
CVS will replace those lost sales by increasing sales of smoking-cessation drugs and perhaps increased sales of e-cigarettes.
For certain, selling all drugs helped boost profits in the most recently reported quarter. It is the future growth of those sales that will likely make the decision to stop selling cigarettes a non-event.
In the fourth quarter, the 3.8% increase in prescription sales helped offset lower customer traffic and lower network claims.
With an aging demographic in the U.S., drug sales are likely to continue to grow for the foreseeable future and because of that, CVS stock is a really good investment opportunity.
Shares are up 2.5% on Tuesday, thanks to strong earnings.
Analysts expect CVS to grow profits by 13% in 2013. At current prices, shares trade for 15 times 2014 estimated earnings.
That price is a small premium to pay for a company that continuously exceeds expectations.
In addition, CVS pays a near-2% dividend — thus you have a tightly constructed stock that holds the promise to deliver in a good or weak market environment.
The expectation for investors going forward is slow and steady gains for CVS stock. Double-digit profit growth and a solid dividend should result in gains for the stock that will beat or exceed the major market averages
The end of cigarette sales may be a sensational headline but overall drug sales put CVS in the no-brainer category.
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