Summary
- CVS is a fully integrated healthcare provider with a leading market share in its core markets and is poised to take advantage of the secular growth in the healthcare industry.
- The company’s dependable growth, consistent profit margins, and strong cash generation are the markings of a superior economic business model.
- The current valuation levels are below the company’s historical averages and provide an attractive risk-adjusted point of entry to purchase shares.
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Investment Thesis
With dependable growth, consistent profits, and strong cash generation, CVS Health Corp. (CVS) CVS is an appealing core holding. Its current valuation provides an attractive entry point. With organic growth in the low to mid-single digits, CVS is not likely to offer fast, high-beta returns; investors seeking this type of holding should look elsewhere.
In this article, we examine CVS through our Five-Factor Framework. The framework provides a consistent methodology to review stock opportunities and compare different stocks.
Factor 1: Financial Performance
Never invest in any company before you've done the homework on the company's earnings prospects, financial condition, competitive position, plans for expansion, and so forth. - Peter Lynch
Revenue
CVS has robust revenue growth and consistent performance from its three segments and expects the growth to continue for the next three years. CVS routinely makes acquisitions, including the significant acquisition of Aetna in November 2018, so it is essential to analyze the company's organic growth in addition to total revenue growth. CVS has generated consistent historical organic revenue growth in the range of 3-5% annually.
CVS is not expecting a material impact from COVID-19 in 2020. The company disclosed on June 10th that its anticipated earnings for 2020 "remain unchanged." Additionally, in earnings call on August 5, 2020, CFO Eva Boratto affirmed earlier guidance by saying:
While acknowledging the inherent and unprecedented uncertainty surrounding COVID-19 and its impact on us, we are raising our full year adjusted EPS guidance to $7.14 to $7.27 to reflect the favorability in the tax rate we experienced in the quarter. In addition, we are increasing our full year 2020 cash flow guidance to $11 billion to $11.5 billion, reflecting the timing of the payments of certain liabilities. (emphasis added)
Analyst consensus forecasts are for revenue growth to remain in the 3-5% range for the next three years.
