CVS: Pharmacies, Clinics and Health Services

10/09/2020 5:00 am EST


Ben Reynolds

CEO, Sure Dividend

CVS Health (CVS) is an integrated healthcare services provider; the company operates more than 9,900 retail locations and 1,100 medical clinics, notes income and growth expert Ben Reynolds, editor of Sure Dividend.

The company also services approximately 103 million plan members after the $78 billion acquisition of Aetna in 2018. It generates annual revenues of about $265 billion.

CVS released earnings results for the second quarter on 8/4/20. Revenue increased 3% to $65.3 billion, while adjusted earnings-per-share (EPS) increased 40% year-over-year.

The COVID-19 pandemic added an estimated $0.70 to $0.80 to adjusted earnings-per-share and $1.8 to $2.1 billion to revenue results during the quarter, due to higher demand for healthcare products.

Same store sales improved 2.4% from the previous year, while medical memberships overall increased 3.3% to 23.6 million members. The company now expects adjusted earnings-per-share of $7.14 to $7.27 for the full year, up from $7.04 to $7.17 previously.

CVS’ most compelling competitive advantage is its entrenched position in the pharmaceutical retail industry. Consumers are unlikely to cut spending on prescriptions, health insurance, and other healthcare products and services, even during difficult economic times.

We believe this makes the company resistant to recessions. From 2008 through 2010, during the Great Recession, CVS actually increased its diluted earnings-per-share by 10%.

CVS has a strong historical growth profile. In the past decade, the company grew earnings-per-share by approximately 10% per year. We also believe the firm has a positive long-term growth outlook going forward.

The company will benefit from the aging U.S. population and rising demand for pharmacy services. We believe pharmacy services growth, in addition to health insurance operations from the Aetna acquisition, will drive 5% annual EPS growth over the next five years.

Based on expected fiscal 2020 adjusted EPS of $7.21, the stock trades at a price-to-earnings ratio (P/E) of just 8.0. The stock has held an average price-to-earnings ratio of 14.6 over the past decade.

Our fair value estimate is a P/E ratio of 11.0, which we view as a prudent fair value P/E multiple. This means expansion of the price-to-earnings ratio could add 5.8% to the annualized returns of the stock through 2025.

We expect this expansion to combine with 5% expected annualized EPS growth and the 3.4% dividend yield, to generate 14.2% total annual returns over the next five years.

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