CVS Stock Study (4-26-24)

Posted by Mark on April 26, 2024 at 13:43 | Last modified: April 27, 2024 13:45

I recently did a stock study on CVS Health Corp. (CVS) with a closing price of $67.33. The previous study is here.

M* writes:

     > CVS Health offers a diverse set of healthcare services. Its
     > roots are in its retail pharmacy operations, where it operates
     > over 9,000 stores primarily in the U.S. CVS is also the largest
     > pharmacy benefit manager (acquired through Caremark),
     > processing over 2 billion adjusted claims annually. It also
     > operates a top-tier health insurer (acquired through Aetna)
     > where it serves about 26 million medical members. The
     > company’s recent acquisition of Oak Street adds primary
     > care services to the mix, which could have significant
     > synergies with all its existing business lines.

This mega-size (over $50B annual revenue) company has grown sales and EPS at annualized rates of 11.2% and 1.3%, respectively, over the last decade. The latter, which excludes a loss in ’18 (goodwill impairment charges), is hurt by non-recurring events in ’22 as mentioned 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.

Historical EPS growth excluding ’22 is 4.3%. Sales are up and mostly straight while EPS are down in ’18 and ’22.

Over the past decade, PTPM lags peer and industry averages while trending lower from 5.5% (’14) to 3.1% (’23) with a last-5-year mean of 3.1%. ROE also lags peer and industry averages while ranging from 5.8% (’22; ’18 excluded) to 18.8% (’17) with a last-5-year mean of 9.7%. Debt-to-Capital is higher than peer and industry averages while increasing from 25.4% (’14) to 50.9% (’23) with a last-5-year mean of 52.9%.

Current Ratio is 0.86 while Interest Coverage is 5.2. Value Line assigns an “A” rating for Financial Strength (down from “A+” one year ago), and M* assigns “Standard” for Capital Allocation.

With regard to sales:

• YF projects YOY 3.6% and 5.9% for ’24 and ’25, respectively (based on 23 analysts).
• Zacks projects YOY 3.6% and 5.3% for ’24 and ’25, respectively (9 analysts).
• Value Line projects 1.5% annualized growth from ’23-’28.
• CFRA projects 1.8% YOY and 3.4% per year for ’24 and ’23-’25, respectively.
• M* gives a 2-year ACE of 4.2% annualized growth.

I am forecasting below the range at 1.0% per year.

With regard to EPS:

• MarketWatch projects annualized growth of 3.2% and 5.2% for ’23-’25 and ’23-’26 (based on 29 analysts).
• Nasdaq.com projects annualized growth of 8.0% and 7.8% for ’24-’26 and ’24-’27 [13/5/1 analyst(s) for ’24/’26/’27].
• Seeking Alpha projects 4-year annualized growth of 2.9%.
• YF projects YOY 5.0% contraction and 10.4% growth for ’24 and ’25, respectively (25), along with 5-year annualized growth of 3.7%.
• Zacks projects YOY 4.9% contraction and 9.3% growth for ’24 and ’25, respectively (11), along with 5-year annualized growth of 9.1%.
• Value Line projects 5.2% annualized growth from ’23-’28.
• CFRA projects 3.9% YOY contraction and 0.8% growth per year for ’24 and ’23-’25 along with a 3-year CAGR of 6.0%.
• M* projects long-term annualized growth of 8.3% (analyst note indicates 6.0% with share buybacks).

I am forecasting below the long-term-estimate range (mean of five using M* 6.0% rather than 8.3%: 5.4%) at 2.0% per year. I will use ’23 EPS of $6.47/share as the initial value. Although up 100% YOY, ’23 EPS only represents a 4.3% annualized increase since ’22. This is normalized.

My Forecast High P/E is 13.0. Excluding ’18 (NMF) and ’22 (upside outlier 35.4), high P/E over the last 10 years trends down, ranging from 24.9 (’14) to 13.1 (’17) with a last-5-year average of 15.3. The last-5-year-mean average P/E is 12.8. I am forecasting below the high P/E range.

My Forecast Low P/E is 8.0. Excluding ’18 (NMF) and ’22 (upside outlier 27.5), low P/E over the last 10 years trends down, ranging from 17.6 (’15) to 9.5 (’20) with a last-5-year average of 10.3. I am forecasting below the range.

My Low Stock Price Forecast (LSPF) is the default value of $51.80 based on $6.47/share initial value. This is 23.1% less than the previous close and 19.6% less than the 52-week low.

Payout Ratio over the last 10 years ranges from 27.8% in ’14 to 39.4% in ’19 excluding ’18 (NMF) and ’22 (upside outlier at 70.1%). The last-5-year mean is 36.7%. I am forecasting below the range at 26.0%.

These inputs land CVS in the HOLD zone with a U/D ratio of 1.4. Total Annualized Return (TAR) is 8.5%.

PAR (using Forecast Average—not High—P/E) of 4.5% is less than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I start by comparing my inputs with those of Member Sentiment (MS). Based on 169 studies (my study and 52 outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 4.4%, 7.2%, 15.5, 10.3, and 40.0%, respectively. I am lower across the board. Value Line’s projected average annual P/E of 10.0 is lower than MS (12.9) and lower than mine (10.5).

MS high / low EPS are $9.29 / $6.28 versus my $7.14 / $6.47 (per share). My high EPS range is lower due to a lower growth rate. Value Line’s high EPS is greater than both at $11.25.

MS LSPF of $62.90 implies a Forecast Low P/E of 10.0: lower than the above-stated 10.3. MS LSPF is 2.8% less than the default $6.28/share * 10.3 = $64.68 resulting in more conservative zoning. MS LSPF is 21.4% greater than mine, however.

TAR (over 15.0% preferred) is much lower than MS 17.2%. MOS is robust in the current study.

With regard to valuation, PEG is 0.9 and 5.1 per Zacks and my projected P/E, respectively: the latter significantly overvalued due to my 2.0% growth-rate denominator. Relative Value [(current P/E) / 5-year-mean average P/E] is a bit cheap at 0.8.

From what I gather, CVS has been in the BI Top 100 for many years. Manifest Investing also continues to be bullish despite waiting years to see management’s lofty promises come to fruition. Per M*, some of these promises may finally be ending:

     > The Aetna merger and recent Oak Street acquisition pushed off
     > durable double-digit earnings growth for nearly a decade, which
     > has been a source of frustration for investors still waiting for
     > that industry standard growth rate. Management has finally admitted
     > defeat on this standard and recently announced a significantly lower
     > profit growth goal for the long run that recognizes the challenges
     > the firm faces particularly in the retail store operations.

CVS is a BUY under $62. With a forecast high price ~$93, my TAR criterion won’t be met until ~$47/share. This can increase with hopes of higher earnings growth [projections].