Thursday, March 15, 2007

Calls of Note Part 7

- Merrill Lynch notes tt seems the long road to finality in the CVS/Caremark merger saga might be only a few days away. While anything is still possible and it would not be prudent to say the merger is a lock, the firm believes there is a good chance the deal becomes finalized. CVS shareholders will vote on March 15 and CMX holders on March 16.

In a scenario where CVS or CMX shareholders vote no to the CMX deal, the firm still sees limited downside to CVS stock. In fact, either way they believe the stock is undervalued. Assuming a minimum P/E multiple of 15.5x on their standalone 2007 EPS estimate of $1.90, MLCO estimates downside risk of approximately 9% to $29.50. However, if the CMX merger is not completed, they believe investors will refocus on fundamentals and see potential upside of 24% to $40. If the CMX deal is completed, the upside could be 39% to $45 assuming 20x on pro forma 2008 EPS of $2.25 (firm's current $2.15 standalone estimate plus $0.10

They see positive catalysts for CVS regardless of the outcome. If ESRX wins out, CVS will receive a $675 million break-up fee and still generate strong sales and earnings growth over the coming years. Maintains Buy.

Notablecalls: It sure looks like CVS may have some upside over the next couple of days. Not a very high conviction call but it's in a defensive sector and 40% upside sounds pretty good.

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