CVS Health Corp (CVS)
Introduction
Good Day! 😊
Let’s take a look at a stock that's caught my attention: CVS Health Corp (CVS). This isn’t just your typical pharmacy chain; CVS is a healthcare giant with a broad range of services. From retail pharmacies to pharmacy benefits management and even health insurance, CVS covers a lot of ground. I’ll try to make the points as concise as possible since I can see this is already turning into a novel (as usual).
History and Evolution
Origins:
CVS was founded as Consumer Value Stores (CVS) in Lowell, MA, in 1963.
Initially, it focused on health and beauty products.
The founders were Stanley and Sidney Goldstein, and Ralph Hoagland.
1967:
The company opened its first stores with pharmacy departments, marking a shift towards becoming a comprehensive healthcare provider.
1970s and 1980s:
CVS continued to expand across the United States.
They introduced pharmacy computers for managing inventory and prescriptions.
1990s Expansion:
The acquisition of over 1,100 stores from People’s Drug, Revco, and Arbor Drugs significantly increased their market presence.
Current Business Segments
Retail/LTC Segment:
This includes CVS Pharmacy and Long-Term Care operations (Omnicare).
Operates over 9,000 retail locations.
Provides prescription drugs, over-the-counter medications, beauty products, and general merchandise.
Omnicare provides pharmacy services to long-term care facilities.
Pharmacy Services Segment:
CVS Caremark manages prescription plans for insurance companies, corporations, and other health plan sponsors.
Processes over 2 billion prescription claims annually.
Offers mail order pharmacy services, specialty pharmacy services, and pharmacy benefit management (PBM) solutions.
Healthcare Benefits Segment:
Encompasses Aetna, providing health insurance services to millions of members.
Offers a wide range of insurance products, including medical, dental, vision plans, Medicare, and Medicaid products.
Focuses on improving patient outcomes and reducing healthcare costs through coordinated care.
Other:
Includes corporate services and specialty pharmacy operations.
Specialty operations include infusion services, clinical trial support, and diabetes care centers.
CVS Specialty provides services for patients with complex conditions requiring advanced medications.
Current Financial Performance
Revenue Breakdown (FY 2023):
Retail/LTC: $91.1 billion
Pharmacy Services: $153.0 billion
Healthcare Benefits: $93.1 billion
Other: $23.2 billion
Total Revenue: $360.94 billion
Costs (FY 2023):
Cost of Sales: $282.3 billion
SG&A Expenses: Over $60 billion
Research and Development: Significant investments in healthcare innovations.
Profitability:
Despite high operational costs, CVS maintains strong profitability
Key Financial Metrics
Market Cap: $74.78 billion
Trailing Dividend Yield: 4.26% easily covered with room for increases
Enterprise Value: $143.9 billion
Earnings Yield: 9.5%
Price-to-Earnings (P/E) Ratio: 10.51
Price-to-Free Cash Flow (P/FCF) Ratio: 9.45
Price-to-Book (P/B) Ratio: 1.01
Return on Assets (ROA): 3.0%
Return on Invested Capital (ROIC): 6.19% (a bit lower than I would like to see; also lower than the WACC of 7.3% which can indicate they are losing capital to poor investments)
Debt Metrics
Long-Term Debt: $55 billion
Debt-to-Equity Ratio: 0.69
Debt management is a critical focus, with efforts to reduce leverage and enhance financial flexibility.
Strategic Acquisitions
Caremark Rx (2007):
$21 billion acquisition.
Enhanced control over the drug delivery chain.
Streamlined operations between retail pharmacy and pharmacy benefits management
Omnicare (2015):
$12.7 billion acquisition.
Expanded reach into the long-term care market.
Strengthened position in providing pharmacy services to long-term care facilities.
Target Pharmacies and Clinics (2015):
$1.9 billion acquisition.
Added over 1,600 pharmacies and nearly 80 clinics to the portfolio.
Improved accessibility and convenience for customers.
Aetna (2018):
$69 billion acquisition.
Integrated pharmacy and PBM services with Aetna’s insurance offerings.
Enhanced ability to provide coordinated and comprehensive healthcare solutions.
Oak Street Health (2023):
$10.6 billion acquisition.
Marked entry into primary care services, offering significant growth opportunities.
Focused on providing care for Medicare patients, aiming to improve patient outcomes and reduce costs.
The move towards Retail Space Reduction
Adaptation to Online Shopping Trends:
Downsizing retail footprint to reduce costs.
Closing underperforming stores to optimize operations.
Transforming remaining locations into HealthHubs and MinuteClinics.
Enhanced Healthcare Services:
HealthHubs and MinuteClinics provide chronic disease management, expanded clinic services, and wellness products.
Aiming to make CVS locations healthcare destinations with comprehensive services.
Positives of Investing in CVS
Diverse Revenue Streams:
Income from retail pharmacies, PBM services, health insurance, and primary care provides resilience against economic fluctuations.
Strategic Acquisitions:
Acquisitions like Caremark, Aetna, and Oak Street Health expanded offerings and created operational efficiencies, enhancing overall performance.
Market Leadership:
Largest market share in the U.S. retail pharmacy market, leveraging scale advantages and competitive pricing.
Primary Care Expansion:
Transforming stores into healthcare hubs with HealthHub and MinuteClinic, enhancing patient care and hopefully some loyalty.
Strong Cash Flow:
Projected FY24 cash from operations: $10.5 billion, allowing investment in new opportunities, debt reduction, and shareholder returns.
Dividend Stability and Growth:
Dividend yield of 4.26% with a history of consistent increases, attracting income-seeking investors and a sustainable payout ratio of 43.5%.
Negatives of Investing in CVS
High Debt Levels:
Long-term debt of $55 billion and a debt-to-equity ratio of 0.69. High debt from acquisitions limits financial flexibility and poses risks in downturns.
Regulatory Risks:
Potential impact from changes in healthcare regulations. Navigating regulatory changes can be costly and complex, requiring constant vigilance.
Competition from Amazon:
Amazon’s entry into the prescription drug market threatens CVS’s market share, necessitating continuous innovation to stay competitive. CVS must leverage its comprehensive services to differentiate from competitors.
Future Plans
Expansion into Primary Care:
Integrating Oak Street Health for Medicare patients, offering comprehensive care, addressing patient needs from prescriptions to primary care, improving patient outcomes and reducing healthcare costs.
HealthHub and MinuteClinic Expansion:
Transforming traditional pharmacy experience, expanding chronic disease management and wellness products, and increasing accessibility to healthcare services.
Leveraging Data and Technology:
Investing in big data and advanced analytics, integrating Aetna’s health data with CVS’s pharmacy and PBM data, offering personalized healthcare plans, and streamlining operations to enhance patient care and operational efficiency.
Growing Primary Care Services:
Expanding primary care services to improve patient care and reduce healthcare costs, managing chronic conditions, reducing hospital readmissions, and improving outcomes, creating significant synergies with existing healthcare offerings.
Debt Reduction Strategy:
Focus on reducing high debt levels, improving financial flexibility, reducing interest expenses, and allocating funds to debt reduction and growth initiatives, with projected FY24 cash from operations at $10.5 billion.
Insights from CVS’s Ratios
Valuation Ratios:
The Price-to-Earnings (P/E) ratio has decreased significantly from 40.46 to 10.53, indicating the stock might be undervalued relative to its earnings.
The Price-to-Sales ratio has consistently remained low, currently at 0.21, suggesting that the stock is trading at a low price relative to its revenues.
The Price-to-Cash Flow ratio of 6.97 is relatively low, highlighting the strong cash generation ability of CVS.
The Price-to-Book (P/B) ratio has also decreased to 1.01, indicating that the stock price is close to its book value, potentially making it an attractive investment.
Profitability Ratios:
Return on Assets (ROA) and Return on Invested Capital (ROIC) are steady at 2.99% and 5.02% respectively, showing effective asset utilization and investment returns.
Return on Equity (ROE) has improved to 10.07%, reflecting enhanced profitability from shareholders' equity.
Net Margin has seen a decline, currently at 1.26%, indicating tighter profit margins which may be due to increased costs or competitive pricing pressures.
Liquidity Ratios:
The Quick Ratio and Current Ratio are at 0.61 and 0.81 respectively, suggesting adequate liquidity to cover short-term liabilities.
Inventory Turnover has improved to 17.76, indicating efficient inventory management.
Asset Turnover at 1.48 shows the company’s efficiency in using its assets to generate sales.
Solvency Ratios:
The Debt to Assets Ratio and Debt to Equity Ratio have slightly increased to 0.33 and 1.11 respectively, indicating a moderate increase in leverage.
Long Term Debt to Total Assets Ratio is stable at 0.29, and Long Term Debt to Total Equity Ratio is at 0.99, showing a consistent approach to managing long-term debt.
Technicals
It looks like we're entering a significant monthly support zone, with a substantial gap above. If we break through the $52 range, I’ll need to reassess. At that point, we might have a solid opportunity to at least fill that gap, if not move higher. We could easily retest that support line again before closing the gap. I don’t expect a sudden turnaround tomorrow, based on the charts, making this a strong candidate for a Dollar Cost Averaging strategy.
Valuation
The Conclusion
So I will give CVS a Fair Value of $58.99 which puts me below the professional analysts out there ( often the case with my numbers) Considering a ✌️ “Safe” ✌️ Dividend of 4.26% with a solid payout ratio of around 45% I have no concerns about starting to add from here using a DCA strategy.
Key Strengths:
Diversified Revenue Streams: Provides resilience against economic fluctuations.
Strategic Acquisitions: This has strengthened the company's market position and expanded its healthcare offerings.
Market Leadership: Largest market share in the U.S. retail pharmacy market, leveraging scale advantages and competitive pricing.
Strong Cash Flow: Projected FY24 cash from operations: $10.5 billion, allowing for investment in new opportunities, debt reduction, and shareholder returns.
Dividend Stability and Growth: Attractive dividend yield of 4.26% with a history of consistent increases.
Red Flags:
High Debt Levels: Long-term debt remains high at $55 billion, with a debt-to-equity ratio of 1.11, which could limit financial flexibility.
Regulatory Risks: Operating in a heavily regulated industry, any changes in healthcare policies could impact operations and profitability.
Competition: Amazon’s entry into the prescription drug market presents a significant threat, necessitating continuous innovation to maintain market share.
Strategic Focus:
Debt Reduction: Continued focus on reducing high debt levels to improve financial flexibility and reduce interest expenses.
Primary Care Expansion: Integration of Oak Street Health and expansion of HealthHubs and MinuteClinics to enhance patient care and loyalty.
Technological Advancements: Leveraging big data and advanced analytics for personalized healthcare plans and operational efficiency.
CVS Health Corp is a healthcare giant with some serious strengths, including diversified revenue streams, market leadership, and strong cash flow. The company's strategic acquisitions have expanded its service offerings and created operational efficiencies, positioning it well in the ever-evolving healthcare landscape.
By focusing on these key areas, I’m feeling pretty confident that CVS is a solid pick to start adding slowly to my portfolio. Personally, I’m all in for buying under $58, but snagging it closer to $50 would be the cherry on top. I'm undeniably bullish on healthcare's future, and I believe CVS is gearing up for a strong, long-term run.
I'd love to hear your thoughts or if you think I've missed something. As I have mentioned before - this is just a hobby for me. I don't have any formal training, so I'm probably overlooking a few things as usual.
That’s my take, hopefully, you enjoyed the read and gained some value from it. I’d love to hear what your thoughts are on CVS for an alternate perspective.
Cheers!
PtahX