CVS Health (NYSE: CVS)
Quality Value Investing Research Report | Updated Coverage | March 2024
Summary:
CVS Health Corporation is a dividend-paying large-cap stock in the health care providers and services industry.
The company has shown solid revenue growth and, sector-beating profit margins and returns on equity and invested capital.
CVS Health’s stock price is undervalued compared to its earnings, cash flow, and sales and has below-average volatility.
However, the company’s current wealth no longer meets Quality Value Investing’s standards as its highly touted business model reinvention has proceeded at a snail’s pace.
When referencing this research report, access your Quality Value Investing (QVI) Glossary of Investing Terms and Metric Targets. Unless noted, all data presented is sourced from Seeking Alpha Premium as of the market close on March 5, 2024, and intended for illustration only.
The 44 holdings in the QVI Real-Time Stock Picks have collectively achieved alpha for 15 years by focusing research and analysis on a company’s current wealth and its share price’s present value. In other words, just the facts without unreliable predictive analysis typical of the buy side or the business modeling overkill of the sell side Wall Street analysts.
In this updated QVI Research Report, we’ll look at the Concentrated Real-Time Stock Picks health care sector holding CVS Health Corporation to see if it continues to meet Quality Value Investing’s active portfolio inclusion criteria based on our checklist analysis of the business’s current wealth and its stock’s present value.
CVS Health: Company Current Wealth
To uncover the company’s current wealth, QVI defines the value proposition, measures returns on management, and assesses enterprise downside risks.
Value Proposition
QVI Research Report’s value proposition section provides a brief synopsis of the company’s business model, major-exchange listing, stock symbol, market capitalization, and dividend-paying status. In addition, it defines the competitive advantages of a company’s products or services to its customers compared to the industry, including its economic moat.
CVS Health CVS 0.00%↑ is a dividend-paying large-cap stock in the health care sector’s providers and services industry. CVS was added to the QVI Real-Time Stock Picks on January 18, 2018, at a split and dividend-adjusted $66.19 a share.
CVS Health Corporation provides health solutions in the United States. It operates through Health Care Benefits, Health Services, and Pharmacy & Consumer Wellness segments.
The Health Care Benefits segment offers traditional, voluntary, and consumer-directed health insurance products and related services. It serves employer groups, individuals, college students, part-time and hourly workers, health plans, health care providers, governmental units, government-sponsored plans, labor groups, and expatriates.
The Health Services segment offers pharmacy benefit management solutions, including plan design and administration, formulary management, retail pharmacy network management, mail order pharmacy, specialty pharmacy and infusion, clinical, and disease and medical spend management services. It serves employers, insurance companies, unions, government employee groups, health plans, prescription drug plans, Medicaid managed care plans, CMS, plans offered on public health insurance and private health insurance exchanges, other sponsors of health benefit plans, and individuals.
The Pharmacy & Consumer Wellness segment sells prescription and over-the-counter drugs, consumer health and beauty products, and personal care products. This segment also distributes prescription drugs and provides related pharmacy consulting and other ancillary services to care facilities and other care settings. It operates online retail pharmacy websites, LTC pharmacies and on-site pharmacies, retail specialty pharmacy stores, compounding pharmacies, and branches for infusion and enteral nutrition services.
The company was formerly known as CVS Caremark Corporation and changed its name to CVS Health Corporation in September 2014. CVS Health was incorporated in 1996 and is headquartered in Woonsocket, Rhode Island, USA.
Economic Moat
Alpha-rich investors target companies with clear competitive advantages from their products or services. An investor can streamline an enterprise’s value proposition with an economic moat assignment of wide, narrow, or none.
For example, Morningstar assigns CVS Health a narrow moat rating.
QVI’s value proposition elevator pitch for CVS Health:
CVS Health is a one-stop healthcare store for insurance, primary care, and prescriptions.
Due Diligence Resources
For a more in-depth analysis of the all-important value proposition, visit CVS Health’s investor relations webpage and its most recent Form 10-K Annual Report submitted to the US Securities and Exchange Commission or SEC.
QVI’s value proposition rating for CVS Health: Bullish.
Returns on Management
QVI Research Report’s returns on management or fundamentals section measures the performance strength of the company’s senior executives by analyzing revenue growth, net profit margin, and returns on equity and invested capital.
Revenue Growth and Net Profit Margin
Per the chart below, CVS Health’s trailing three-year annualized revenue growth was in the low-double-digits, outperforming the health care sector’s +6.76% median growth. In addition, the company’s topline growth was +10.88% for the most recently reported twelve months.
Farther down the income statement, CVS Health’s three-year, low-single-digit net profit margin outperformed the sector’s negative median net margin of -4.49%.
Returns on Equity and Invested Capital
CVS Health’s senior management produced a three-year low-double-digit return on equity or ROE below QVI’s targeted threshold but well ahead of the sector’s negative median ROE of -41.87%.
Stock buyback programs often elevate ROE. For example, CVS Health’s board of directors approved $10 billion for repurchases in November 2022 after completing a prior $10 billion buyback. Are they buying back the stock at value prices for its shareholders?
CVS Health’s three-year return on invested capital, or ROIC, was below QVI’s threshold but embarrassed the sector’s negative median ROIC of -41.87%. In addition, CVS Health’s ROIC exceeded its weighted average cost of capital, or WACC, of 4.83%, demonstrating that its senior executives are average capital allocators, barely covering their capital costs. (Source of WACC: GuruFocus)
Despite double-digit three-year revenue growth, sector-beating profit margins and returns on equity and invested capital, CVS is underperforming QVI’s targets. This suggests the need for performance improvement beyond topline growth for CVS Health’s management team in northern Rhode Island.
QVI’s fundamentals rating for CVS Health: Neutral.
Next, we’ll look at the company’s returns on management chart, enterprise downsize risks, the stock price’s present value, share price downside risks, and the investment thesis, each exclusive to Quality Value Investing’s premium (paying) subscribers.
Disclosure: At the time of this writing, I/we had a beneficial long position in the common shares of CVS in our family portfolio.