CVS: New Health Services Strategy = Healthy Financials

CVS Health Corporation (CVS) has created a moat that makes beating its business very hard.  The firm operates in healthcare benefits, pharmacy services, and retail/long-term care spaces.  The company has a logical and sound strategy to increase sales through these three business segments, which makes me bullish about this stock.

Its geographic footprint is the overarching business fact that gives CVS a cudgel with which to beat its competitors.  Currently, the company has a store within 10 miles of 85% of all Americans.  I found the sheer volume of work performed by CVS to be incredible: 2.9 billion prescriptions filled, 66 million vaccines administered, and 100 million members of the Caremark service.  The company plans to use that geographic footprint to expand its reach into primary health care, by transforming their Minute Clinics from a place where you go for a vaccination or an earache to a place where you go for maintenance of long-term illnesses such as sleep apnea and diabetes. 

As CVS has seen in the stores where this new concept (called a Health Hub) has been rolled out, front-of-retail-store sales have also increased because of the increased foot traffic the health services draw. 

CVS also plans on increasing its healthcare benefits business by attracting more government-sponsored Medicare business. 

While listening to Karen Lynch, the CEO of CVS, during their Investor Relations Day on December 11, 2021, I got the sense that she, as a relatively new CEO (a role she took over on February 1, 2021), had a plan for the company. I also felt that she was the right person to make sure it was fully executed in a timely fashion.  

Recent Results and Dividend

CVS’s stock has been trading between $68.02 (the 52-week low set on February 26, 2021) and $106.38 (the 52-week high set on January 5, 2022). 

CVS brought in revenues of $283.99 billion over the last twelve months with a net income of $7.55 billion. 

The company has reported third-quarter earnings of $1.97 per share, beating analyst estimates of $1.78 per share by $0.19.  It has also reported $6.43 in earnings per share for the first nine months of 2021, beating analyst estimates of $5.58 for that period.  

CVS currently pays a dividend of $0.55.  This represents a dividend yield of 1.94% annually.  This was a recent increase of 10% from its previous dividend, paid during the third quarter, of $0.50.  While this is a notable increase that is greater than inflation (so this investment is paying more over time in real value), this was the first dividend increase in several years.    

The company has a solid set of financial statements.  CVS has a current ratio of 0.94, so the company has almost enough current assets on hand to pay its bills over the next year.  I usually like to see a current ratio of 1 or higher. Still, I think that 0.93 is close enough to consider this a very safe investment, i.e., it will be able to pay its bills in the future. 

When I calculated the stock’s intrinsic value by modeling discounted cash flows, I pegged it at $239.13. 

Wall Street’s Take

21 Wall Street analysts currently cover CVS and have issued 12-month estimates for the price.  Of the 21, 18 rate the stock as a Buy, with a high forecast stock price of $125.00, an average CVS stock price of $114.10, and a low stock price of $106.  The implied upside on the stock is 9.5%.

Additionally, TipRanks.com shows that of the 41 bloggers that have blogged about CVS, 88% of them are bullish, while the sector average is approximately 73% bullish.

Conclusion

Based on the intrinsic value of this stock, the Wall Street analysts’ estimates, and the blogger estimates covering CVS, I am bullish on this stock.  This company has created a business model and moat that will be hard for its competitors to beat.  I am excited to see where the company and the stock price go from where it is today.

Disclosure: At the time of publication, Tim O’Rourke did not own any of the securities mentioned in this article.