Can CVS Health Corp (CVS) Stock Stop Infuriating the Bulls?

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CVS Health Corp (NYSE:CVS) is one of the few stocks I have lost money on during the current bull market. Try as I might, I have real difficulty making sense of CVS stock at times.

Fundamentally, there is little to argue with. Revenues have been growing at 15% per year, and the company brings 3% of that to the bottom line.

The balance sheet took a hit in 2015 when it took over Target Corporation (NYSE:TGT) pharmacies as part of a $1.9 billion deal, and bought Omnicare, a pharmacy for nursing homes, for $12.9 billion. I bought on that news, and the units continue to perform as expected.

Despite this, CVS stock now is worth one-third less than it did when the deals went down. The pharmacy chain has a market cap of $80 billion with trailing year revenue of $177 billion. Rival Walgreens Boots Alliance Inc. (NASDAQ:WBA), meanwhile, has a market cap of nearly $87 billion with 2016 revenue of $117 billion.

It makes no sense.

CVS Should Be a Buy

CVS Health is due to report earnings the morning of Tuesday, Aug. 8. Analysts are expecting $1.31 per share in earnings on revenue of $45.36 billion, with a “whisper number” of $1.33 per share. The estimates are midway between the numbers reported the last two quarters.

If CVS can average $1.30 per share over the full year, that’s $5.20 per share in earnings on a stock trading at $79 — a price-to-earnings multiple of under 14. The P/E based on trailing-year results is 16.2, still below the market. Both figures are well below WBA’s 20 multiple.

Part of the problem is that CVS is seen by thee market as “just” a retailer. It’s not. Omnicare has captive customers, and through its Caremark pharmacy benefit manager (PBM), CVS controls more. The drugs it makes part of its “standard formulary” can gain a boost over rivals, so its move from an Eli Lilly and Co. (NYSE:LLY) to a Johnson & Johnson (NYSE:JNJ) diabetes drug is bearish for Lilly, bullish for JNJ.

Generic drugmakers have had their own way with pharmacies for some years, so the moves by CVS and competitors to start pushing prices down is significant. For bears, this reduces the pharmacy’s top line, and shows its PBM is feeling margin pressure.

But we can put a more bullish gloss on all this.

All the drug chains are working with wholesalers to push down drug costs for patients, and these are the only forces in the market that are allowed, through formularies, to bargain on prices. In short, it’s the only thumb being placed on the scale of healthcare costs, and it’s finally being placed.

Why Is Wall Street Bearish on CVS Stock?

Bearishness on a stock is as much a state of mind as a measure of performance.

Sentiment on CVS remains bearish. No matter how well CVS does, the bears will have their excuses. What about same-store sales? What about the possibility of Amazon.com, Inc. (NASDAQ:AMZN) entering the pharmacy space?

Well, what of it? Pharmaceuticals aren’t like groceries. Entering the business requires a channel that runs through drug companies of all types, through to consumers in the many forms through which they buy drugs. There is already a big mail-order drug business. It hasn’t hurt the pharmacy chains.

CVS is not a highflier, and it was a mistake for investors (including me) to see it as one. But it is a steady grower, it does have its hands all over the space — retail, wholesale, dispensary — and its connections will keep growing thanks to a new agreement with the Cleveland Clinic that should also benefit its MinuteClinic locations.

CVS stock should be tracking the market, at the very least — not trailing it.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he was long AMZN.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2017/08/cvs-health-corp-stock-q2-earnings/.

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