Rating Update: Stock Rating B-Positive (2/6/20)-CVS Health Corp (CVS).

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BUSINESS

CVS Health Corporation, together with its subsidiaries, provides integrated pharmacy health care services. It operates through Pharmacy Services and Retail/LTC segments. The Pharmacy Services segment offers pharmacy benefit management solutions, such as plan design and administration, formulary management, Medicare Part D services, mail order, specialty pharmacy and infusion services, retail pharmacy network management services, prescription management systems, clinical services, disease management programs, and medical pharmacy management services.
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INVESTMENT RATING

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CVS is expected to continue to be a modest Value Builder reflecting capital returns that are forecasted to be above the cost of capital.

CVS Health has a current Value Trend Rating of B (Positive).
The Value Trend Rating reflects inconsistent signals from PTR’s two proprietary measures of a stock’s attractiveness. CVS Health has a neutral Appreciation Score of 55 but a very high Power Rating of 88, producing the Positive Value Trend Rating.

CVS Health’s stock is selling below targeted value. The current stock price of $70.84 compares to targeted value 12 months forward of $83.
This neutral appreciation potential results in an appreciation score of 55 (45% of the universe has greater appreciation potential.)
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CVS Health has a Power Rating of 88. (This very high Power Rating indicates that CVS has a better chance of achieving attractive investment performance over the near to intermediate term than all but 12% of companies in the universe.)
Factors contributing to this very high Power Rating include: recent price action has been extremely favorable; and earnings estimate behavior for CVS has been slightly favorable recently. An offsetting factor is is currently in an unfavorable positi.

INVESTMENT PROFILE

CVS Health’s financial strength is above average. Financial strength rating is 67.
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Relative to the S&P 500 Composite, CVS Health Corp has moderate Value characteristics; its appeal is likely to be to Income-oriented investors; the perception is that CVS is normal risk. The only relative weakness is CVS Health low expected growth. CVS Health’s valuation is low: high dividend yield, low P/E ratio, and low price/book ratio. CVS has unusually high market capitalization.

CURRENT SIGNALS

CVS Health’s current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; falling tax keep rate; and falling leverage.

CVS Health’s current technical position is very strong. The stock price is in a 7.7 month up move. The stock has appreciated 45.2% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

Notable negative changes in CVS Health Corp (NYSE: CVS) investment behavior have recently occurred: negative upside/downside volume developed.
CVS Health Corp (NYSE: CVS) suffers from small negative changes in fundamentals: significant quarterly earnings deceleration occurred.
The stock is currently rated B.
CVS Health Corp (NYSE: CVS) stock suffered a major decline of -14.0% on 2/6/20. The shares closed at $0.04. NORMAL trading volume accompanied the decline. The stock has been exceptionally strong relative to the market over the last nine months and is unchanged during the last week.

CASH FLOW

In 2018, CVS Health generated a very significant increase in cash of +$4,766 million (+262%). Sources of cash were much larger than uses. Cash generated from 2018 EBITDA totalled +$13,509 million. Non-operating uses consumed -$7,658 million (-57% of EBITDA). Cash taxes contributed +$2,679 million (+20% of EBITDA). Re-investment in the business amounted to -$69,594 million (-515% of EBITDA). On a net basis, debt investors provided +$44,702 million (+331% of EBITDA) while equity investors contributed +$21,128 million (+156% of EBITDA).
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CVS Health’s Non-operating Income, %EBITDA has suffered a strong overall downtrend over the period. This downtrend was accompanied by stability for the Cvs Health Corp Peer Group. (Since 2015 Non-operating Income, %EBITDA has accelerated very sharply.) In most years, CVS Health was in the second quartile and lower quartile. Currently, CVS Health is lower quartile at -57% of EBITDA (-$7,658 million).

CVS Health’s Cash Taxes, %EBITDA enjoyed a strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Cvs Health Corp Peer Group. (Since 2016 Cash Taxes, %EBITDA has accelerated very sharply.) In most years, CVS Health was in the third quartile and top quartile. Currently, CVS Health is upper quartile at +20% of EBITDA (+$2,679 million).

CVS Health’s Business Re-investment, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Cvs Health Corp Peer Group. (Since 2016 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, CVS Health was in the top quartile and second quartile. Currently, CVS Health is lower quartile at -515% of EBITDA (-$69,594 million).

CVS Health’s Debt Investors, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Cvs Health Corp Peer Group. In most years, CVS Health was in the third quartile and top quartile. Currently, CVS Health is upper quartile at +331% of EBITDA (+$44,702 million).

CVS Health’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Cvs Health Corp Peer Group. (Since 2015 Equity Investors, %EBITDA has accelerated very sharply.) In most years, CVS Health was in the third quartile and second quartile. Currently, CVS Health is upper quartile at +156% of EBITDA (+$21,128 million).

CVS Health’s Change in Cash, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Cvs Health Corp Peer Group. In most years, CVS Health was in the third quartile and second quartile. Currently, CVS Health is at the upper quartile at +35% of EBITDA (+$4,766 million).
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CVS Health’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Cvs Health Corp Peer Group as well. In most years, CVS Health was in the lower quartile. Currently, CVS Health is substantially below median at +3%.

PROFITABILITY

CVS Health’s return on equity has eroded very significantly since 2009.
A major analytical focus for CVS is a very strong negative trend in pretax operating return a significantly augmented by very strong negative trend in non-operating factors.
The productivity of CVS Health’s assets declined over the full period 2009-2019: asset turnover has suffered an downtrend that accelerated very sharply after the 2017 level.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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CVS Health’s return on equity is at the lower quartile (7.1%) for the four quarters ended September, 2019.
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Operating performance (pretax return on assets) is lower quartile (3.1%) reflecting asset turnover that is lower quartile (1.11X) and lower quartile pretax margin (2.8%).
Tax “keep” rate (income tax management) is lower quartile (66.0%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is upper quartile (3.52X).

GROWTH RATES

There are no significant differences between CVS Health’s longer term growth and growth in recent years.
CVS Health’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been 12.3% per year.

Total asset growth has been 15.6% per year.

Annual E.P.S. growth has been 12.2% per year.

Equity growth has been 6.9% per year. (More recently it has been 21.0%.)

CVS Health’s consensus growth rate forecast (average of Wall Street analysts) is 4.7% — substantially below the average of the historical growth measures.
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Relative to the Cvs Health Corp Peer Group, CVS Health’s historical growth measures are erratic. Revenue growth (12.3%) has been upper quartile. Total asset growth (15.6%) has been upper quartile. E.P.S. growth (12.2%) has been substantially above median. Equity growth (6.9%) has been at median.

Consensus growth forecast (4.7%) is lower quartile.
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PRICE HISTORY

Over the full time period, CVS Health’s stock price performance has been below market. Between April, 2009 and February, 2020, CVS Health’s stock price rose +123%; relative to the market, this was a -42% loss. Significant price move during the period: 1) August, 2010 – July, 2015: +317%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 6.9% is below median relative to the S&P 500 Composite.
In addition to being below median relative to S&P 500 Composite, current annual total return performance through January, 2020 of 6.9% is above median relative to CVS Health Corp Peer Group.

Current 5-year total return performance of -4.8% is lower quartile relative to the S&P 500 Composite.
Through January, 2020, with lower quartile current 5-year total return of -4.8% relative to S&P 500 Composite, CVS Health’s total return performance is lower quartile relative to CVS Health Corp Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, CVS’ overall valuation is quite low. The highest factor, the price/earnings ratio, is below median. Ratio of enterprise value/earnings before interest and taxes is at the lower quartile. Ratio of enterprise value/assets is lower quartile. Price/equity ratio is lower quartile. The lowest factor, the ratio of enterprise value/revenue, is lower quartile.

Relative to CVS Health Corp Peer Group, CVS’ overall valuation is normal. The highest factor, the ratio of enterprise value/revenue, is upper quartile. Price/earnings ratio is slightly above median. Ratio of enterprise value/earnings before interest and taxes is at median. Ratio of enterprise value/assets is at the lower quartile. The lowest factor, the price/equity ratio, is at the lower quartile.
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CVS Health has a very large value gap compared to the median valuation. For CVS to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 0.71X to 0.61X. If CVS’ ratio of enterprise value/revenue were to fall to 0.61X, its stock price would be lower by $-20 to $51.
For CVS to fall to lower quartile valuation relative to the CVS Health Corp Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 0.71X to 0.47X. If CVS’ ratio of enterprise value/revenue were to fall to 0.47X, its stock price would decline by $-45 from the current level of $71.

VALUE TARGETS

CVS is expected to continue to be a modest Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
CVS Health’s current Price Target of $84 represents a +19% change from the current price of $70.84.
This neutral appreciation potential results in an appreciation score of 55 (45% of the universe has greater appreciation potential.)
With this neutral Appreciation Score of 55, the high Power Rating of 88 results in an Value Trend Rating of B.
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CVS Health’s current Price Target is $84 (-16% from the 2018 Target of $100 but +19% from the 02/06/20 price of $70.84). This slight fall in the Target is the result of a +27% increase in the equity base and a -34% decrease in the price/equity multiple. The forecasted decline in return on equity has a very large negative impact on the price/equity multiple and the forecasted increase in cost of equity has a slight negative impact as well. Partially offsetting these Drivers, the forecasted increase in growth has a very large positive impact.
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PTR’s return on equity forecast is 11.8% — slightly below our recent forecasts. Forecasted return on equity enjoyed a dramatic, steady increase between 2010 and 2018. The current forecast is above the 2010 low of 9%.

PTR’s growth forecast is 13.0% — above our recent forecasts. Forecasted growth suffered a dramatic, variable decline between 2010 and 2018. The current forecast is steady at the 2010 peak of 11%.

PTR’s cost of equity forecast is 10.6% — in line with recent levels. Forecasted cost of equity suffered a dramatic, steady increase between 2010 and 2018. The current forecast is above the 2011 low of 8.4%.
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At CVS Health’s current price of $70.84, investors are placing a negative value of $-4 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 6.0% per year, and a return on equity of 15.6% versus a cost of equity of 10.1%.
PTR’s 2020 Price Target of $84 is based on these forecasts and reflects an estimated value of existing assets of $69 and a value of future investments of $15.

About John Lafferty 61383 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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