CVS Health Corp: Why CVS Stock Deserves Investors’ Patience

CVS stock could be on its way to becoming a bargain

CVS Health Corp (NYSE:CVS) reports earnings Tuesday with analysts expecting it will earn $1.31 per share, about $1.45 billion, making the 43 cent/share dividend it paid out last month very affordable again.

But don’t expect a rush toward the stock. CVS stock has gone nowhere for some time. The stock is down 8.6% since the last time it reported earnings in May, and down nearly 17% over the last year.

It’s just as bad at rival Walgreens Boots Alliance Inc (NASDAQ:WBA), which is also down, by about the same amount. Investors just don’t like drug store stocks right now.

This has not been reflected in CVS financial results, which continue to march forward.

Quarterly revenues for March were $43.2 billion, against $36.3 billion a year before. Net income was down $80 million, from $1.22 billion to $1.14 billion, as the company absorbed the drug outlets of Target Corporation (NYSE:TGT) obtained last year. The $1.9 billion deal with Target was expected to help margins after it was completed in February. So far, it hasn’t.

What Is Going on With CVS Stock?

While the Target deal created headlines, CVS’ debt-to-assets ratio rose last year from 15% to over 25%, mainly so that CVS could buy Omnicare, the largest provider of drug services in nursing homes. The total price of that deal was $12.7 billion, including assumption of Omnicare debt.

The integration of Omnicare and Target’s pharmacies offers great growth opportunities, but it costs money and takes time. Eventually, Target will also provide a platform for the growth of CVS’ MinuteClinic business, which delivers front-line medical care without appointments. Omnicare will benefit from the retirement of the baby boomer generation.

CVS is asking its investors for patience.

Unlike Walgreens Boots, CVS Health also owns a Pharmacy Benefit Manager, Caremark. PBMs act as middlemen between insurers and doctors, controlling the disbursement of drugs to patients. CVS has about 24% of that business.

But traders worry about new competition in the PBM space. UnitedHealth Group Inc (NYSE:UNH) recently bought Catamaran and has 22% of the market — Express Scripts Holding Company (NASDAQ:ESRX) leads with 29%.

There is concern that the consolidation of the space will lead to more government scrutiny. There should also be concern that health insurers like UNH may want to gain more control over costs by handling prescriptions and disbursements themselves.

That may be a concern, but in the latest “selling season” for contracts Caremark retained 97% of its customers. Concern has not turned into trouble.

Is CVS a Bargain?

The negative view of the drug store space may have made CVS a bargain. The price-to-earnings multiple on the stock is down to 20, only a little better than the market as a whole.

There’s also a 1.83% yield on the new dividend rate. Investors should also expect the top line to grow at 10%. You’re getting $153 billion in sales on $98 billion in market cap — that’s a P/E of 0.6, close to that of a mainline retailer like Target, whose stock is also down over the last three months.

The tastes of traders for various market sectors are subject to change without notice. This is why investors are often advised to trade out of hot sectors, and trade into cold ones, for the best long-term gains. As traders have abandoned the drug store space maybe it’s time for longer-term investors to give CVS another look.

Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time.  Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in CVS.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/08/cvs-stock-investors-patience/.

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