Credit Suisse Has Overweight On CVS (CVS)

Credit Suisse has an Outperform rating and a $42 price target on shares of CVS Caremark Corporation CVS. In a note to clients, Credit Suisse writes, "The CVS/Caremark transaction is quickly rising among the ranks of disappointing deals in corporate M&A history. We find the company's continued mismanagement of Caremark and its lack of insight into the underlying issues disturbing. That being said, we believe overwhelmingly negative investor sentiment has created a compelling risk/reward set-up in the stock. We continue to believe CVS's problems are fixable and that a recovery into the generic wave could yield 30% upside, while the lack of any improvement will likely result in a value accretive break-up within the next year. This note explores a potential break-up in detail to help investors frame the downside protection." Credit Suisse goes on to say, "Caremark problems are mostly self-inflicted; asset still has attractive value. There is clearly a problem with Caremark, in our opinion, as 2011 guidance implies a 14-15% organic decline in EBIT on top of a 14% drop in 2010. We estimate the company has destroyed $8-9 billion in value since completing this transaction. Fortunately, many of the problems have been self inflicted and the external perception among most customers and consultants remains good. We therefore believe Caremark is still an attractive asset despite its challenges. A break-up is likely if Caremark does not improve in the next year. The departure of Tom Ryan opens the door for a break-up, as new CEO Larry Merlo and PBM President Per Lofberg are not married to the deal. We also believe activist investors may attempt to force the issue if management is complacent. While a break-up would be complicated given the potential negative synergies from unwinding the retail/PBM model, the issues are manageable in our view." Shares of CVS gained 30 cents on Friday to close at $33.06, a gain of 0.9%.