CVS Stock Study (4-24-23)

Posted by Mark on May 22, 2023 at 07:21 | Last modified: April 24, 2023 14:45

I recently did a stock study on CVS Health Corp. (CVS) with a closing price of $74.84.

Value Line writes:

     > CVS Health Corp. is the nation’s foremost integrated health-
     > care services provider, combining one of the nation’s leading
     > pharmaceutical services companies with the country’s largest
     > pharmacy chain. It fills or manages roughly four billion
     > prescriptions per year through its Pharmacy Services and
     > Retail/LTC segments and has 9,600-plus locations across the
     > U.S. and Puerto Rico. Acquired Drogaria Onofre, giving it a
     > presence in Brazil in 2/13. Retail stores average about
     > 9,900 square feet. Pharmacy (Rx) contributes 77.5% of sales.

This mega-size (over $50B annual revenue) company has grown sales and EPS at annualized rates of 11.2% and 1.2%, respectively, over the last decade. The latter, which excludes a loss in ’18 (goodwill impairment charges), was hurt by non-recurring events in ’22. This is explained in the 10-K:

     > Operating income decreased $5.4 billion, or 41.3%, in 2022
     > compared to 2021. The decrease in operating income was
     > primarily driven by the $5.8 billion of opioid litigation charges
     > and declines in the Retail/LTC segment, which included a $2.5
     > billion loss on assets held for sale related to the write-
     > down of the Company’s Omnicare® long-term care business.

Excluding ’22 [and ’18], historical EPS growth is 5.3%.

Sales are up and mostly straight while EPS dips in ’18 and ’22. PTPM has trended lower over the last 10 years while lagging peer and industry averages. The last-5-year average is 2.6%.

ROE has also lagged peer and industry averages over the previous decade with a last-5-year average of 7.1%. Debt-to-Capital has been higher than peer and industry averages with a last-5-year average of 53.9%. Interest Coverage is 3.5 and although Value Line offers an A+ rating for Financial Strength, M* rates “on the weak side of Standard” for Capital Allocation.

I forecast long-term annualized sales growth of 2% based on the following:

• CNN Business projects 3.5% YOY and 0.5% growth per year for ’23 and ’22-’24, respectively (based on 13 analysts).
• YF projects YOY 3.7% growth and 2.0% contraction for ’23 and ’24, respectively (21 analysts).
• Zacks projects YOY 4.0% growth and 2.7% contraction for ’23 and ’24, respectively (7).
• Value Line projects 3.4% annualized growth from ’22-’27.
• CFRA projects 1.1% YOY growth and 3.0% contraction per year for ’23 and ’22-’24, respectively.
• M* gives a 2-year ACE of 3.0% annualized growth.

I am forecasting conservatively.

I forecast long-term annualized EPS growth of 26% based on the following:

• CNN Business projects 1.0% YOY and 2.3% growth per year for ’23 and ’22-’24, respectively (based on 13 analysts), along with 5-year annualized growth of 6.7%.
• MarketWatch projects annualized growth of 2.6% and 4.8% for ’22-’24 and ’22-’25 (25 analysts).
• Nasdaq.com projects growth of 2.7% YOY and 7.0% per year for ’24 and ’23-’25, respectively (11, 9, and 6 analysts for ’23, ’24, and ’25).
• Seeking Alpha projects 4-year annualized growth of 5.9%.
• YF projects YOY 0.9% and 3.4% for ’23 and ’24, respectively (22), along with 5-year annualized growth at 5.0%.
• Zacks projects YOY 0.8% and 2.6% for ’23 and ’24, respectively (9), along with 5-year annualized growth of 7.3%.
• Value Line projects 4.8% annualized growth from ’22-’27.
• CFRA projects 2.0% YOY and 5.6% per year for ’23 and ’22-’24, respectively, along with a 3-year projected CAGR of 5%.
• M* projects long-term annualized growth of 5.6%.

I am forecasting below the long-term-estimate range at 4% (mean of six: 5.9%).

As discussed above, non-recurrent events sapped 2022 earnings. Value Line, which excludes one-time charges, lists ’21 and ’22 EPS as $8.40 and $8.69 as opposed to M* $5.95 and $3.14. To be conservative, I will project out five years from Value Line’s ’21 (not ’22) stated EPS to get $10.22. This is roughly equivalent to a 26% growth rate on $3.14 to get $9.97.

My Forecast High P/E is 12. Excluding ’18 (NMF) and ’22 (upside outlier 35.4), high P/E over the last 10 years has ranged from 13.1 (’17) to 24.9 (’14) with a last-5-year average of 15.6. I am forecasting below the range.

My Forecast Low P/E is 6. Excluding ’18 (NMF) and ’22 (upside outlier 27.5), low P/E over the last 10 years has ranged from 9.5 (’20) to 17.6 (’15) with a last-5-year average of 10.4. I am forecasting below the range.

My Low Stock Price Forecast (LSPF) is the default value of $50.40. This is 30.8% less than the previous close and 25.9% less than the ’21 low (stock currently trades near the 52-week low).

Payout Ratio over the last 10 years has ranged from 24.0% in ’13 to 39.4% in ’19 excluding ’18 (NMF) and ’22 (upside outlier 70.1%). The last-5-year average is 36.5%. I am forecasting conservatively at 20.0%.

These inputs land CVS in the HOLD zone with an U/D ratio of 2.1. The Total Annualized Return (TAR) is 12.1%.

PAR (using Forecast Average—not High—P/E) is 6.5%. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 495 studies done in the past 90 days (122 total outliers including my own excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 5.0%, 7.9%, 17.5, 12.6, and 33.8%. I am lower on everything but EPS growth for which I modified the projection point. Value Line projects a future average annual P/E of 12.0, which is lower than MS (15.1) and higher than me (9.0). What this all implies for MOS is unclear.

With regard to other data, MS high and low EPS are $4.70/share and $4.45/share compared to my $9.97 and $8.40. MS seems to be confused on two counts. First, despite projecting a 7.9% EPS growth rate per year, MS low and high EPS [both five years into the future] are only 6% apart. This is not something I have noted before, but going forward with other stock studies I probably should. Second, although the $4.70 is ~ $3.14 * (1.08 ^ 5), that basically leaves ’27 earnings equal to ’15-’16. According to Value Line, both EPS (and FCF/share) have nearly doubled over that time interval.

While these observations cast doubt over the current batch of MS data, analysts’ estimates do support the depressed MS high and low EPS. Without exclusion of one-time charges, I would expect a much higher growth rate to reclaim the historical trendline (e.g. my 26%, or ’23 and ’24 EPS projections for TGT, which I last studied on 4/19/23). The highest of five long-term EPS estimates—Zacks at 7.3%—is not suggestive of any catch-up and with analyst long-term growth rates understood as projections from the last completed FY, no catch-up will be forthcoming. I question the apparent contradiction.

MS LSPF is $57.00 (13.1% higher than mine). This is consistent with the default $4.45 * 12.6 = $56.07.

I would look to re-evaluate this stock under $65/share.