I have a reasonably high level of confidence in those forecasts based on the excellent historical track record of analyst estimates when made one year and two years forward as evidenced by the following Analyst Scorecard:
Additionally, Morningstar believes that CVS possesses a wide economic moat and that their large claim volume affords them the opportunity to take advantage of two key industry drivers: “supplier pricing leverage and centralized cost scale.”
The following excerpt from their analyst report speaks to CVS’s strong returns on invested capital and their long-term growth opportunity:
“CVS Health has pursued a vertically integrated strategy to try and capture as much value as possible from the retail pharmacy industry. The firm has established itself as a top-tier pharmacy benefit manager and one of the largest U.S. pharmacy retailers. Its stalwart competitive advantages have churned out outstanding returns on invested capital and have given it a wide economic moat. We anticipate robust growth for the pharmaceutical industry over the long term, which should provide CVS with a solid platform for continued success.”
In the most recent report provided by Zacks they highlight the recent Omnicare acquisition and suggest that it will contribute to future growth opportunities. They also believe that the recent Target Pharmacy purchase represents a strategic fit, and reports a positive view that the PBM business is gaining traction. Zacks also considers CVS’s specialty pharmacy business to be a high-growth driver. And they cite the opportunity regarding domestic demographic trends as a result of our aging population.
On the other hand, Zacks also points out CVS’s vulnerability to federal and state reimbursement laws due to their high dependence on Medicare, Medicaid and other government-sponsored health programs. They also address the potential competitive threat from the Walgreens Boots Alliance and Rite Aid pending merger. However, that merger is currently facing FTC scrutiny. Personally, I believe that there is room for both powerhouses to flourish in the future. Moreover, although I consider both WBA and CVS to be excellent businesses, I currently favor CVS based on a more attractive current valuation. For perspective, here is the earnings and price correlated F.A.S.T. Graph on WBA:
Summary and Conclusions
I suggest that CVS Health Corporation currently provides the opportunity for above-average long-term total returns over the next several years. I base my position on the company’s exceptional historical operating results, its growing dividend, and most importantly its current attractive valuation. In my opinion, the company’s recent stock price weakness is primarily attributed to the past overvaluation. Consequently, now that the company’s price has returned to fair value, I have become interested in learning more about this great business. Moreover, I would consider any further price weakness an opportunity to invest in a great business at a very attractive valuation.
Disclosure: Long CVS
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.
Note: This article is written by Chuck Carnevale and was originally published at FASTgraphs.com.
