In August, CVS Caremark (NYSE:CVS) announced it would buy back $4 billion worth of its shares. Is this the catalyst you need to buy?

Last month, CVS’s second-quarter results beat analysts’ estimates by a penny. This led Standard & Poor’s Equity Research analyst Joseph Agnese to reiterate his “strong buy” rating on the stock. According to Barron’s, Agnese wrote, “With pharmacy benefit management retention rates trending in line with the prior year, we expect CVS to gain share through new business wins as it negotiates 2012 contracts.”

Is this one of S&P’s good calls, or should you steer clear of CVS? Here are two reasons S&P might be right:

• Decent earnings reports. CVS has been able to beat analysts’ expectations fairly consistently and has done so in four of its past five earnings reports.
• Fair valuation. CVS’s price/earnings-to-growth ratio of 1.01 (where a PEG of 1.0 is considered fairly priced) means its stock price is not too high. It currently has a P/E of 14.3, and its earnings per share are expected to grow 14.1% to $3.17 in 2012.

Two reasons against:

• Under-earning its cost of capital. CVS is earning less than its cost of capital — and it’s making no progress. How so? It’s producing no EVA momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first half of 2011, CVS’s EVA momentum was 0%, based on first six months’ annualized 2010 revenue of $95.5 billion, and EVA that fell from first six months’ 2010 annualized -$84 million to first six months’ 2011 annualized -$344 million, using a 7% weighted average cost of capital.
• Increasing sales and profits — but debt-laden balance sheet. CVS has been increasing sales and profits. Its revenue has increased at a 21.8% annual rate, from $43.8 billion (2006) to $96.4 billion (2010), while its net income has increased at a 24.8% rate, from $1.4 billion (2006) to $3.4 billion (2010) — yielding a slim 4% net profit margin. Its debt has grown faster than its cash. Specifically, its long-term debt has risen at a 31.6% annual rate, from $2.9 billion (2006) to $8.7 billion (2010), and its cash rose at a 27.4% annual rate, from $531 million (2006) to $1.4 billion (2010)

CVS has used its borrowing capability to acquire — most notably pharmacy-benefit manager Caremark. But CVS has yet to demonstrate that it can achieve big enough efficiency boosts from the deal to justify its high capital costs. It might be that current CVS management lacks the operational expertise required to get there.

However, if CVS stock drops enough or its earnings growth is substantially higher than expected, then I’d consider buying the stock.

Peter Cohan has no financial interest in the securities mentioned.