Analysts Choice: CVS Not Perfect, Still A Keeper

2/22/2016


  Recent Price
$98
  Dividend
$1.70
  Yield
1.7%
  P/E Ratio
19
  Shares (millions)
1,114
  Long-Term Debt As % Of Capital
41%
  52-Week Price Range
$113.65 - $81.37

From some angles, CVS Health ($98; CVS) defies what we typically seek in a stock. Its Overall score is just 68, hurt by middling ranks for Value and Earnings Estimates.

In other ways, CVS remains highly attractive. Its trailing P/E ratio of 19 is 18% below the average S&P 500 Index consumer-staples stock and in line with its own five-year norm. The company also generates unusually strong growth, with sales up 10% and per-share profits up 15% in 2015. Just 9% of S&P 500 stocks grew both sales and per-share profits by double digits in the past 12 months — and only 5% of those also have trailing P/Es below 20. Last year, CVS also generated its highest return on equity since 2006.

Additionally, CVS generates virtually all of its business in the U.S., insulating the company from currency issues and political turmoil overseas. While the average S&P 500 stock has slumped 9% so far this year, CVS shares have risen 1%. Recent operating momentum appears sustainable and should position the shares to keep outperforming in a difficult environment. The stock is a Buy and a Long-Term Buy.

Business breakdown

The pharmacy-services unit (58% of 2015 sales, 36% of operating profit) reported 13% higher sales last year. The retail business (42%, 64%) posted more modest growth, with sales up 6%. Total same-store sales advanced 1.7% for the year, as 4.5% growth in pharmacy sales more than offset a 5.0% decline for front-store sales. The retail unit's profit margins have declined, dragged down by a higher mix of lower-margin pharmacy sales, pressure on drug-reimbursement rates, and fewer generic-drug launches than anticipated. Management warns that margins could remain under pressure in the first half of 2016.

CVS expects per-share profits of $5.73 to $5.88 this year, implying growth of 11% to 14%. The stock trades at 17 times the consensus profit estimate of $5.82 per share, a 24% discount to its sector average.

CVS is still digesting a couple of acquisitions made last year, most notably specialty-drug distributor Omnicare, acquired in August in a deal valued at $12.7 billion. The retail business will get a boost from CVS opening rebranded pharmacies in more than 1,600 Target ($72; TGT) stores. CVS expects to complete the conversions by the end of the summer.

The core business should continue to generate organic growth. CVS says its pharmacy-services unit has secured $12.7 billion in net new business for 2016, up from the $11.5 billion the company announced in December. The unit's customer-retention rate stands at 98%.

Dividend rising

Management has grown its quarterly dividend at annualized rate of 28% over the past five years, including a 21% hike on Feb. 2. CVS now pays out 30% of earnings through its dividend, up from 14% in 2010. Investors should expect a continuation of robust dividend growth, given the company's healthy cash-flow trends and management's stated payout-ratio target of 35% by 2018.

An annual report for CVS Health Corp. is available at 1 CVS Drive, Woonsocket, RI 02895, (401) 765-1500, www.cvs.com.

CVS HEALTH
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Dec '15
1.53
vs.
1.21
11%
113.58
-
84.37
23 - 17
Sep '15
1.28
vs.
1.15
10%
113.65
-
97.87
24 - 21
Jun '15
1.22
vs.
1.13
7%
105.46
-
97.06
23 - 21
Mar '15
1.14
vs.
1.02
11%
101.59
-
83.61
23 - 19
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2015
153.29
5.16
1.40
113.65
-
81.37
22 - 16
2014
139.37
4.49
1.10
98.62
-
64.95
22 - 14
2013
126.76
3.96
0.90
71.99
-
49.00
18 - 12
2012
123.13
3.42
0.65
49.80
-
41.01
15 - 12
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
68
59
49
84
40
47
67

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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