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2010 Zacks Investment Research, All Rights reserved. www.zacks.com

CVS Caremark Corporation (CVS-NYSE)

SUMMARY

SUMMARY DATA

Risk Level * Averag

Type of Stock Large-ValuIndustry Retail-Drug StZacks Industry Rank * 45 out of 21

Current Recommendation UNDERPERFORMPrior Recommendation NEUTRAL

Date of Last Change 01/13/2010

Current Price (01/12/10) $33.56

Target Price $30.00

CVS Caremark s third quarter earnings came in $0.65, a cent above the Zacks Consensus Estimaand higher than $0.60 reported in the year-ago perioRevenues increased 18.2% year over year to $24billion driven by robust growth of both segmentsPharmacy Services and Retail Pharmacy. Tcompany is maintaining its momentum and recenopened its 7000th store. However, we remain deeconcerned with the loss of $4.8 billion of contracts 2010. Additionally, the company is being investigatby the Federal Trade Commission for some of business practices. We believe all these issues w

have a negative impact on the stock price. As a reswe downgrade the stock to Underperform with a targprice of $30.

52-Week High $38.0152-Week Low $23.98One-Year Return (%) 35.53Beta 0.72Average Daily Volume (sh) 11,886,578

Shares Outstanding (mil) 1,411Market Capitalization ($mil) $47,353Short Interest Ratio (days) 1.44

Institutional Ownership (%) 80Insider Ownership (%) 1

Annual Cash Dividend $0.31Dividend Yield (%) 0.92

5-Yr. Historical Growth RatesSales (%) 31.7Earnings Per Share (%) 20.9Dividend (%) 21.6

P/E using TTM EPS 13.2P/E using 2010 Estimate 12.2

P/E using 2011 Estimate 10.6

Zacks Rank *: Short Term1 3 months outlook 3* Definition / Disclosure on last page

ZACKS ESTIMATES

Revenue(In millions of $)

Q1 Q2 Q3 Q4 Year

(Mar) (Jun) (Sep) (Dec) (Dec)

2008 21,326 A 21,140 A 20,863 A 24,142 A 87,472 A

2009 23,394 A 24,871 A 24,642 A 26,534 E 99,441 E

2010 24,535 E 24,811 E 24,593 E 24,593 E 98,532 E

2011 10,522 ENote: Quarterly revenues may not add up to annual revenues due to roundingoff

Earnings Per Share(EPS is operating earnings before non-recurring items)

Q1 Q2 Q3 Q4 Year

(Mar) (Jun) (Sep) (Dec) (Dec)

2008 $0.55 A $0.60 A $0.60 A $0.70 A $2.44 A2009 $0.55 A $0.65 A $0.65 A $0.79 E $2.64 E2010 $0.65 E $0.69 E $0.69 E $0.73 E $2.76 E2011 $3.17 ENote: Quarterly EPS may not add up to annual EPS due to rounding off

Zacks Projected EPS Growth Rate - Next 5 Years % 14

Consensus Projected EPS Growth - Next 5 Years % 13

January13, 2010

http://www.zacks.com/

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OVERVIEW

Headquartered in Woonsocket, Rhode Island, CVS Caremark Corporation (CVS) is the largest provideof prescriptions and related health care services in the US. The company, one of the largest domestintegrated pharmacy service providers operates through two business segments: Retail Pharmacy anPharmacy Services. At the end of the third quarter, these two segments accounted for 51% and 49%

respectively of total revenues of the company. At the end of December 2008, CVS had 6,923 retadrugstores (of which 6,857 operated a pharmacy) located in 41 states and the District of Columbia.

The Retail Pharmacy segment sells prescription drugs and general merchandise (front store productswhich includes over-the-counter (OTC) drugs, greeting cards, film and photo finishing services, beautand cosmetic products, and convenience food through the company s stores, as well as througCVS.com (the company s online store). For the year 2008, prescription drugs, OTC products, cosmeticand general merchandise accounted for 68%, 13%, 4% and 15%, respectively, of Retail Pharmacrevenues. In 2008, total pharmacy sales represented 67.5% of total Retail Pharmacy segment saleswhile front-end general merchandise generated the remaining 32.5%.

The company s Pharmacy Services business provides a full range of prescription benefit managemen

(PBM) services including mail order pharmacy services, specialty pharmacy services, plan design anadministration, formulary management and claims processing. At the end of September 2009, thsegment operated 49 retail specialty pharmacy stores, 20 specialty mail order pharmacies and 6 maservice pharmacies in 25 states, Puerto Rico and the District of Columbia. The specialty pharmacie(including mail order and retail specialty pharmacy) support individuals that require complex anexpensive drug therapies.

CVS/Caremark Corporation is making inroads into pharmaceutical manufacturers with PharmaCare, itPharmacy Benefit Management operations and through its merger with Caremark. Eckerd HealthcarServices (Eckerd s PBM) was fully integrated with PharmaCare (CVS PBM) prior to the merger witCaremark. The company has developed many strategies including near-term plans to improve generiand formulary compliance at both mail-order and retail pharmacy levels and the introduction of enhance

persistency and adherence programs. In the long-term, management is developing a broad-based healtmanagement program, which will lead to high quality health and pharmacy services that will also loweoverall health care costs.

CVS Caremark Corporation s retail growth is based on geographic expansion, while improving operationthrough efficient product and cost management initiatives. Expansion has been achieved both by thconstruction of new stores and through acquisitions. Using a 10,000 12,000 sq. ft. prototype, thcompany continues to expand at a rapid pace in high growth markets such as Florida, Texas, Californiaand Arizona. In addition, the company continues to relocate, modernize, and add stores in currenmarkets.

CVS Caremark has initiated many steps to make prescription drugs more affordable to consumers. Som

of these programs are: Maintenance Choice, a flexible fulfillment option that enables patients the choicof picking up their 90-day supply of maintenance medications at any CVS/pharmacy store or obtaininthem through mail order in either case at the cost of mail for both the payer and the patient; BridgSupply enables patients to avoid gaps in care while waiting for their medication to arrive in the mail bobtaining a bridge supply of their prescriptions at any CVS/pharmacy store at no additional charge, and new ExtraCare Health Card program which offers discounts on certain Flexible Spending Accouneligible and over-the-counter health care products sold in any of the CVS/pharmacy stores.

Acquisitions have played a major role in the company s growth:

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In 1997, CVS acquired more than 2500 stores from Revco the largest acquisition in the historof the US retail pharmacy industry.The acquisition of 200 stores from Michigan-based Arbor Drugs in 1998 brought its store total t4,100 across 24 states.In 2004, CVS completed its acquisition of 1,268 Eckerd Stores in addition to Eckerd HealtServices, which includes Eckerd s mail order and pharmacy benefit management services fromJC Penney. Following the deal, CVS store count increased to more than 5,000 locations, makinit one of the leading pharmacy retailers in the US.

The trend continued in 2006 as well, when CVS acquired 700 Sav-On and Osco drugstores fromAlbertsons for $2.93 billion. The deal enhanced the company s presence in the fast growinmarkets of southern California, the Midwest and the Southwest.In October 2008, CVS acquired Longs Drug Stores Corporation for $2.9 billion. The deabroadened the company s geographic presence into the attractive markets of Hawaii, CaliforniaNevada, and Arizona.

In September 2006, CVS acquired MinuteClinic, which offers retail-based clinical services in the USsupplementing the company s business by providing value-added healthcare services in CVS pharmacand other retail locations. At the end of December 2008, the company operated 560 MinuteClinics in 2states of which 534 were located within CVS/pharmacy stores. Staffed primarily by nurse practitionerand physician's assistants, MinuteClinics treat a limited number of common ailments and offer routin

vaccinations. They are also open seven days a week and never require an appointment thdiscourages unnecessary and expensive emergency room visits.

In March 2007, CVS merged with Caremark Rx Inc., a pharmacy benefits manager creating CVCaremark Corporation. The deal combined two leading companies that participate in the changinhealthcare delivery industry. Management hopes to leverage the core strengths of Caremark with thgoal of establishing CVS Caremark as a powerful healthcare service company. The deal should enablpersonalized care services, lower costs, expand choice at lower rates, enhance the companypurchasing power, reduce drug input costs and pharmacy operating costs, and offer broader choices disease management. CVSCaremark is expected to fill more than 1 billion prescriptions annually.

During the third quarter, CVS Caremark made certain changes in structure of its segments. This includereclassification of certain administrative expenses previously recorded within the PBM and retasegments to a new corporate segment. The corporate segment consists of certain costs which benefboth the operating divisions equally. Following this decision, the company now has three segmentsPharmacy Services, Retail Pharmacy and Corporate. In addition, certain changes were made within thPBM segment which will affect margins only within this segment.

REASONS TO SELL

CVS Caremark is likely to suffer due to Caremark s (its PBM segment) loss of several contractfor 2010. The company came out with this disclosure during the third quarter conference cal

Caremark has lost contracts for 2010 worth $3.7 billion during the third quarter, in addition tanother $1.1billion in contracts lost earlier in the year. The loss of these contracts will lead to sharp reduction in the growth and operating margin of the PBM segment. The company expectoperating profit in the PBM segment to decline as much as 10%-12% in 2010.

Lost business included a $1billion contract to provide prescription management services to statemployees in New Jersey, and a contract with the state of Ohio valued at $500 million, which thcompany attributed to a regulatory issue. In addition, CVS Caremark lost a large number oMedicare Part D drug benefit members worth approximately $1.7 billion. The company also los

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its PBM contract to service pensioners of Chrysler and Coventry Health Care. Coventry filed lawsuit in September against CVS Caremark accusing it of overpaying claims.

This is not the end of problems for CVS Caremark. The company is being investigated by thFederal Trade Commission related to the impact of its $26 billion merger with Caremark. Wbelieve these issues will keep the stock subdued for the time being.

Intense competition and tough industry conditions are major impediments. Major competitorssuch as Walgreens, Target and Wal-Mart, are expanding their pharmacy businesses. Competitiois especially stiff in the pharmacy segment, as other retail businesses continue to add pharmacdepartments and low-cost pharmacy options become available. Discount retailers, in particulahave made substantial inroads in gaining market share.

CVS generic drug sales are being negatively affected by Wal-Mart s entry in the retail generdrug marketplace. In September 2006, Wal-Mart began providing generic drugs for only $4 for month s supply. The program encompasses over 360 generic prescription drugs. Some of thesgeneric drugs include the commonly prescribed drugs Metformin, used for the treatment odiabetes and Lisinopril, used to control high blood pressure. Due to Wal-Mart s broad array omanufacturers in India, Israel, and the US, the mass merchant can offer generic drugs at discounted price compared to the $10 to $30 generic drug co-pay. Though the initiative may nobe profitable for Wal-Mart, the program allows the mass merchant to increase store traffic angain market share. However, Wal-Mart s generic drug program is pressuring the margins on thgeneric drugs that CVS offers.

The industry is highly regulated at both the federal and state levels. Any changes to governmenregulation in an effort to curb rising health care costs could severely impact the PBM industry anin turn demand for the company s services. Additionally, operations could suffer if employerdecide to drop healthcare coverage for employees as a result of the recession and rising cost opremiums.

Prescription volumes across the drug store industry are moderating as mail order operators gaimarket share. In addition, drug store prescription sales are pressured by lower reimbursemenrates, increased prescription co-payments by the insurers, and increased generic usage. Alsosince its inception in 2006, the Medicare Drug Benefit has resulted in increased utilization andecreased pharmacy gross margin rates as higher margin pharmacy business (such as cash anstate Medicaid customers) migrated to Medicare Part D coverage. Further, as a result of thMedicare Drug Benefit, the PBM clients could decide to discontinue providing prescription drubenefits to their Medicare-eligible members.

RISKS

In case of a recovery in the US economy, employment is likely to increase, which will bringmore people under the insurance coverage provided by employers. This is likely to benefCVS thereby boosting its profitability.

Our recommendation could go wrong if CVS succeeds in winning significant contracts in thforthcoming period.

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RECENT NEWS

CVS Caremark Beats by a Penny November 5, 2009

CVS Caremark s third quarter earnings came in at $0.65, a cent above the Zacks Consensus Estimatand higher than $0.60 reported in the year ago period. Revenues increased 18.2% year over year t$24.6 billion primarily due to robust growth of both segments - Pharmacy Services and Retail PharmacyHowever, gross margin declined to 20.3% in the reported quarter compared to 21.1% in the year agperiod.

We are pleased to see the robust performance of the pharmacy services segment during the reportequarter. Revenues increased 23.4% to $13.0 billion. Revenue growth would have been higher at 27.2%but for the recent generic introductions. While pharmacy network claims processed during the quarteincreased 9% year over year to 146.5 million due to the addition of RxAmerica claims and new clienwins, offset partially by a reduction in claims due to the termination of two large contracts (effectivbeginning of 2009), mail choice claims increased 11.4% to 16.4 million.

The performance of the retail pharmacy business is also quite commendable. Revenues increase

17.9% to $13.6 billion in the third quarter of 2009. Despite industry wide pricing pressure in the pharmacbusiness, results over the past several quarters have demonstrated strong sales trends with comparablsame store sales growing at solid rates. Pharmacy growth was also helped by a double-digit increase iflu related prescriptions, which the company expects will continue through the fourth quarter.

Total same store sales increased 5.7% over the prior year period. While pharmacy same store sales ros8%, front end same store sales increased 0.8%. Meanwhile, growth in private label sales during thquarter more than doubled the rate of other sales in the front store, which is good from the margiperspective.During the reported quarter, private labels accounted for 17% of front store sale, up 12basis points versus last year. The company is emphasizing the inclusion of more private labels due to itpositive impact on margin.

Pharmacy same store sales were negatively impacted by 380 basis points due to recent generi

introductions whereas Maintenance Choice program had a positive impact of 250 basis points. Generdispensing rate increased both in the pharmacy services and retail segment by 320 basis points to 68.3%and 210 basis points to 70.1%, respectively.

Based on the strong third quarter performance, CVS Caremark increased the lower end of its guidancfor 2009. The company now expects earnings per share in the range of $2.61-$2.64, up from thprevious guidance of $2.59-$2.64.

VALUATION

CVS Caremark reported yet another strong quarter. Revenues increased 18.2% year over year to $24.billion primarily due to robust growth of both segments - Pharmacy Services and Retail Pharmacy. Thcompany is maintaining momentum in the retail space and recently opened its 7000th store in MinnesotaWhile we are pleased to note that the PBM segment added 125 new clients during the quarter anmaintained a retention rate of 92%, we remain concerned about the lost contracts.

During the third quarter conference call, CVS disclosed that its PBM segment had lost contracts for 201worth $3.7 billion during the third quarter, in addition to another $1.1 billion in contracts it had lost earliein 2009. The company expects operating profit of the PBM segment to decline by 10% - 12% in 2010. I

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addition to this, the company is being investigated by the Federal Trade Commission for some of itbusiness practices. We believe that these issues will keep the stock subdued for the time being.

CVS Caremark s current trailing 12-month earnings multiple is 13.2, compared to the industry average o21 and 29 for the S&P 500. Based on forward earnings estimates, the stock is trading at a steep discounto the industry. Over the last five years, CVS shares have traded in a range of 10.5X to 26.4X trailing 12month earnings. Given the challenging environment being faced by CVS, we downgrade the stock tUnderperform with a price target of $30. Our target price is based on 10.9X our 2010 EPS estimate o$2.76.

Key Indicators

P/EF1

P/EF2

Est. 5-YrEPS Gr%

P/CF(TTM)

P/E(TTM)

P/E5-YrHigh

(TTM)

P/E5-YrLow

(TTM)CVS Caremark Corporation (CVS) 12.2 10.6 14.0 10.0 13.2 26.4 10.5

Industry Average 17.4 16.0 12.3 11.3 21.0 115.6 11.7

S&P 500 15.4 13.6 10.7 12.4 29.0 28.2 13.8

Walgreen Company (WAG) 15.9 13.6 14.2 12.3 17.3 31.9 11.4Rite Aid Corporation (RAD) 6.0 0.8 450.0 19.7

TTM is trailing 12 months; F1 is 2010 and F2 is 2011, CF is operating cash flow

P/BLastQtr.

P/B5-Yr High

P/B5-Yr Low

ROE(TTM)

D/ELast Qtr.

Div YieldLast Qtr.

EV/EBITDA(TTM)

CVS CaremarkCorporation (CVS) 1.4 3.4 1.1 10.5 0.2 1.0 7.6

Industry Average 2.9 2.9 2.9 -5.9 0.0 3.2 14.0

S&P 500 3.6 10.0 2.9 20.1 1.9

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Earnings Surprise and Estimate Revision History

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To Read What Other Analysts Say About CVS

Go to: http://www.stockresearchwiki.com/tiki-index.php?page=CVS/Ticker

DISCLOSURES & DEFINITIONS

The analysts contributing to this report do not hold any shares of CVS. Zacks EPS and revenue forecasts are not consensus forecastAdditionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to tspecific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy andoes not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particulainvestment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or thsolicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long oshort in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securitiescovers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve monthNeutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve monthsUnderperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The curre

distribution of Zacks Ratings is as follows on the 1033 companies covered: Outperform- 14.4%, Neutral- 79.5%, Underperform 5.5%. Data as of midnight on the business day immediately prior to this publication.

Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The modassigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. ZacRank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness ofcompany s industry group. We have 217 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 217. In terms investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on eacstock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5

thgroup has the highe

values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to thsecond, third, and fourth groups of stocks, respectively.

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