Do CVS’ fundamentals and value proposition line up with its current trend?

Looking for value in the stock market is something that I have found can be done in any market condition, but it is something that tends to get dismissed by most pundits simply because it isn’t very sexy. Names like Tesla, Netflix, and Amazon practically never make the value list because the massive amount of attention the market has given them for years has kept their stocks priced at levels that makes them impractical to consider strictly on the basis of value. Under most market conditions, looking for value means passing over the names and pockets of the market that get the most attention from media and the general investing public to dig into the industries that everyone else tends to overlook.

If you’ve been following me in this space at all, or participating in my weekly options trading webinar, you already know that CVS is a good, old friend that I’ve followed for quite some time. Since my last review on this stock, the company has released a new earnings report, which shows continued stabilization of its operating profits based on Net Income after quite a bit of pressure throughout the pandemic. The short-term result is that my long-term target price has dropped a bit from above $100 around the mid point of last year to around $82 – just a little below the stock’s current price.

The last couple of weeks have reintroduced market uncertainty and volatility to the broad market, as questions about whether interest rates will increase and when we will finally be able to put the health crisis behind us, investors seem to be coming to grips with the reality that we can’t simply that COVID-19 is a thing of the past. The delta variant of the virus has been causing new waves infection rates in various parts of the country, mostly among the unvaccinated population, and that means that the role CVS and other pharmacy companies will take as places the public at large can go to get vaccinated will continue to be an important of this year’s story. This is a company that was already gaining traction in its broad transformation from just a drugstore/specialty retailer to a health care company providing a variety of services locally and affordably, and it is hard not to take CVS seriously. The company is uniquely positioned for the current environment, not only in the pharmacy space but also with what I think is a big competitive advantage over the rest of its industry owing to its 2018 merger with insurer Aetna.

The stock experienced a significant upward trend from early November 2020 to late May of this year, where it peaked at nearly $91 per share. After falling back to around $80 in August, the stock began moving higher until the start of September. The market’s latest bearish push has also forced the stock to drop off of its latest short-term peak at around $87. Is the drop an opportunity to “buy the dip,” and just as important, where is the stock’s value price right now? Let’s dig in to find out.

Fundamental and Value Profile

CVS Health Corporation, together with its subsidiaries, is an integrated pharmacy healthcare company. The Company provides pharmacy care for the senior community through Omnicare, Inc. (Omnicare) and Omnicare’s long-term care (LTC) operations, which include distribution of pharmaceuticals, related pharmacy consulting and other ancillary services to chronic care facilities and other care settings. It operates through three segments: Pharmacy Services, Retail/LTC and Corporate. The Pharmacy Services Segment provides a range of pharmacy benefit management (PBM) solutions to its clients. As of December 31, 2016, the Retail/LTC Segment included 9,709 retail locations (of which 7,980 were its stores that operated a pharmacy and 1,674 were its pharmacies located within Target Corporation (Target) stores), its online retail pharmacy Websites,, and, 38 onsite pharmacy stores, its long-term care pharmacy operations and its retail healthcare clinics. CVS has a market cap of $81 billion. Aetna Inc. is a diversified healthcare benefits company. The Company operates through three segments: Health Care, Group Insurance and Large Case Pensions. It offers a range of traditional, voluntary and consumer-directed health insurance products and related services, including medical, pharmacy, dental, behavioral health, group life and disability plans, medical management capabilities, Medicaid healthcare management services, Medicare Advantage and Medicare Supplement plans, workers’ compensation administrative services and health information technology (HIT) products and services. The Health Care segment consists of medical, pharmacy benefit management services, dental, behavioral health and vision plans offered on both an Insured basis and an employer-funded basis, and emerging businesses products and services. The Group Insurance segment includes group life insurance and group disability products. Its products are offered on an Insured basis. CVS has a market cap of $111.6 billion.

Earnings and Sales Growth: Over the last twelve months, earnings declined by about -8.33%, while Revenues rose by 11.13%. Earnings increased in the last quarter by 18.63% while sales rose by a little over 5%. The company’s margin profile is very narrow, but after showing some indications of pandemic-driven weakness, has begun stabilizing in the last couple of quarters; over the last twelve months Net Income was 2.59% of Revenues, and 3.83% in the last quarter.

Free Cash Flow: CVS’s free cash flow is healthy at about $11.6 billion. That does mark a decline from $13.6 billion in June of last year, and $12.9 billion in the quarter prior; however the current number still translates to a healthy Free Cash Flow Yield of about 10.32%.

Debt to Equity: CVS has a debt/equity ratio of .81. That is a generally conservative number that has dropped from 1 over the past year. In the last quarter Cash and liquid assets were about $10.1 billion (compared to $8.7 billion in the previous quarter) versus $59.3 billion in long-term debt. The vast majority of that debt comes from the acquisition of health insurer Aetna, however the fact that long-term debt has dropped from about $65 billion since the beginning of 2020 is a good reflection of the company’s success so far (with plenty of work still to go) in transitioning these disparate organizations into a larger, productive company.

Dividend: CVS pays an annual dividend of $2.00 per share, and which translates to an annual yield that of about 2.36% at the stock’s current price. It is also noteworthy that, while dividend increases have been suspended (not because of COVID, but to give the company flexibility to reduce debt gradually from the Aetna merger), management has maintained the dividend at current levels.

Value Proposition: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target at about $82 per share. That does mark a sizable reduction from than my 2020 fair value target, which was around $103 and below the $91 my analysis provided at the beginning of this year. It is also about -3% below the stock’s current price, which puts a useful bargain price at around $65 per share.

Technical Profile

Here’s a look at CVS’ latest technical chart.

Current Price Action/Trends and Pivots: The diagonal red line marks the stock’s upward trend from November 2020 to its peak in May at around $91. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. After bottoming at around $80 in August, the stock hit a short-term high at the beginning of this month at almost $88 before dropping back again. Current support is around $84, with immediate resistance at around $86. A push above $86 has room to next resistance at around $88, with additional room to its 52-week high at $91 if bullish momentum picks up. A drop below $84 should find next support at around $80.

Near-term Keys: If you prefer to work with short-term trading strategies, the best opportunity on the bullish side would come from break above resistance at $86; that would be a good signal to buy the stock or work with call options with an eye on $88 to $91 as a useful exit point. A bearish signal would come from a drop below $84, with $80 providing a useful target no matter whether you choose to short the stock or buy put options. From the standpoint of value and long-term opportunity, the stock’s increase into May far outpaced the company’s fundamental strength. The stock’s pullback from that high wasn’t enough to make the stock a useful value opportunity; the stock would need to fall into a much more sizable downward trend to offer a useful value-based opportunity.

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