12/29/2018
CVS Health Corp NYSE: CVS
This stock has been hit by recent market drops (19% down in the last month) but also happens to be positioned in the consumer market where it could have price improvement in a recession or broader downturn in the market. There was much ado about CVS's purchase of Aetna so I've been aware of it for some time and thought it might be worth a look. But this is a hard stock to predict, looking at most analysts track records they get it wrong every time (20% accuracy) and virtually nothing can be learned from their opinion.
CVS Health Corp NYSE: CVS
This stock has been hit by recent market drops (19% down in the last month) but also happens to be positioned in the consumer market where it could have price improvement in a recession or broader downturn in the market. There was much ado about CVS's purchase of Aetna so I've been aware of it for some time and thought it might be worth a look. But this is a hard stock to predict, looking at most analysts track records they get it wrong every time (20% accuracy) and virtually nothing can be learned from their opinion.
Price at write-up $65.19
Indexes (30, 180 day looks)
VIX: 28.34 (53%, 134%)
TED: 48.38
S&P500: 2486 (-9.4%, -14.7%)
Valuation Ratios
Target: $85
Since the argument for this company is based on its verticle integration I'll go ahead and splash in the divisions.
Omnicare & its Long-term care and related services (for seniors) including Pharmacy service segment with benefits management including 1,700 pharmacies within Target stores in addition to its 8000 in-store pharmacies. The inclusion of its minute clinics is an interesting addition, and unknown to me and the CVS of my youth, with a fairly clear value to individuals with obvious simple problems. If services can be delivered cheaper, faster, or more effectively than through traditional general practices it could be a win. Except it would require the client to know enough to know the precise level of care they need, a proposition I find dubious.
Indexes (30, 180 day looks)
VIX: 28.34 (53%, 134%)
TED: 48.38
S&P500: 2486 (-9.4%, -14.7%)
Valuation Ratios
| Price/Earnings (TTM) | 41.7 |
| Price/Sales (TTM) | 0.45x |
| Earnings per share | 1.56 |
| Price/Book (MRQ) | 1.81x |
| Price/Cash Flow (TTM) | 20.41x |
| Held by institutions | 67.12% |
| Short interest | 0.88% |
| Dividend | 3.07% |
| MarketCap | $66.4B |
Target: $85
Since the argument for this company is based on its verticle integration I'll go ahead and splash in the divisions.
Omnicare & its Long-term care and related services (for seniors) including Pharmacy service segment with benefits management including 1,700 pharmacies within Target stores in addition to its 8000 in-store pharmacies. The inclusion of its minute clinics is an interesting addition, and unknown to me and the CVS of my youth, with a fairly clear value to individuals with obvious simple problems. If services can be delivered cheaper, faster, or more effectively than through traditional general practices it could be a win. Except it would require the client to know enough to know the precise level of care they need, a proposition I find dubious.
Aetna was purchased for 77 billion and I'm not sure of the value. It's only useful if CVS itself can deliver care cheaper than alternatives for Aetna users. They don't make the drugs, they don't deliver the care, so what is it they can vertically integrate? They already ran the pharmacies. In any event, dividend increases and share buybacks are off the table until the debt to adjusted EBITDA is down to 3.0x which will be sometime after 2020 when CVS expects that number to be 3.5x. I believe it's under 5 currently. Merging with Aetna was an interesting way to retain 12% of CVS' revenue.
Electronic medical records are still wracked with proprietary conflicts, to all our detriment, though CVS should dodge the bullet of disruption on this particular facet. The recent focus on both biotech and technology integration shouldn't leave it completely unscathed, indeed, through its partnership with Teladoc it may have just sidestepped such an issue.
Baby boomers will continue to flood the overstressed healthcare system, increasing demand on pubic financing as they become dependant on Medicare (65+). Without an individual mandate, it will be impossible for the "pre-existing condition" consumer not to destroy the coverage of all other users. Without the individual mandate, it will be impossible for insurers to remain solvent and cover everyone who needs coverage as those who already know they need coverage have it and there's no healthy people to share the costs with. A return to the individual mandate would mean a broad reshaping of the healthcare industry some shadow of the level of change single payer or public option could do, in a different direction, but now we'll just have chaos.
Administrative expenses still account for 30% of all expenditures (in the Health Care industry) which seems ridiculous to me, though it includes billing, collections, and payment processing. It's a target rich environment for cost-cutting and expense control.
Consumer-driven healthcare is seen as a leading solution to reign in excessive costs, but is toothless when all costs are externalized - worse it's probably not the best idea to have the least informed shoulder the burden of primary decision making. The only solution to the consumer's ridiculous demands of "free to me" is high deductibles which solves the immediate issues at the price of increasing the costs of those who failed to treat.
My Thoughts
Insiders seem to be doing a right awesome job of selling at highs and accumulating near lows, funny how they can be so spot on when their sells and buys are alledgedly completely disconnected from their inside information. They accumulate below 61-64 and sell at all other times, notably reducing at prices over $78.
The US marketplace is already beset with the Moral Hazard from "free to me" healthcare and we are facing the backlash of high deductible plans. This is unlikely to end as constituents have insisted laws be passed to increase coverage to almost comical levels, where new mothers get two "free" breast pumps regardless of any considerations and often without a co-payment, so the breast pump buisness is great as manufacturers and resellers are able to name their price - is it any wonder that prices are out of control?
Lives cannot have infinite value either, but we continue to attempt to value them as such which also raises the price of health insurance as those whose deaths are inevitable consume the lions share of all of our available resources. We can't afford basic healthcare for little Jimmy because we can't bear to watch our parents die this week and prefer to have their suffering prolonged until their eventual death later this year. It's a sad state we've walked ourselves into as Americans. And it won't soon be rectified until we can face some hard truths, and I find the probability of that happening quite low.
In the meantime, we've found a backdoor solution - let's make it horrendously expensive for everyone from the word go! It's the perfect solution to the corner we've painted ourselves into. No matter, let's creating cost savings through Verticle integration. The path will be long, difficult, and uncertain, but perchance is lined in gold.
CVS is making a go of it. In addition to the recently settled, if we can call it that, Aetna deal CVS got an insurer, its previous acquisition of Caremark gave it a drug plan manager, all to add to its drug stores and what I presume are cheap walk-in clinics. While it will be positioned to steer its customers toward its own low-cost care, those who don't prefer it will likely move on to Wal-greens and the like. I don't actually believe CVS will see much increase in total services rendered with it's current infrastructure, all gains in the next few years from the business itself will likely be from the verticle integration while the appreciation of the stock price will come from a change in market sentiment about the future of businesses in CVS's position.
CVS isn't saying it's trying to do primary care but that's the short of vertical integration I'd want to see. There it would have the means to cut costs. As healthcare costs continue to rise low cost providers are likely to win, but I don't think this is it.
Conclusion
At a price under 64, and preferably toward $61, there's value in a trade here with a re-eval and likely sale as the share price approaches $80. This is supported by insiders own historic approach and the trend in volitility, however if the market doesn't bounce back in the first quarter and instead drops another 10+% that's going to be a problem.
Baby boomers will continue to flood the overstressed healthcare system, increasing demand on pubic financing as they become dependant on Medicare (65+). Without an individual mandate, it will be impossible for the "pre-existing condition" consumer not to destroy the coverage of all other users. Without the individual mandate, it will be impossible for insurers to remain solvent and cover everyone who needs coverage as those who already know they need coverage have it and there's no healthy people to share the costs with. A return to the individual mandate would mean a broad reshaping of the healthcare industry some shadow of the level of change single payer or public option could do, in a different direction, but now we'll just have chaos.
Administrative expenses still account for 30% of all expenditures (in the Health Care industry) which seems ridiculous to me, though it includes billing, collections, and payment processing. It's a target rich environment for cost-cutting and expense control.
Consumer-driven healthcare is seen as a leading solution to reign in excessive costs, but is toothless when all costs are externalized - worse it's probably not the best idea to have the least informed shoulder the burden of primary decision making. The only solution to the consumer's ridiculous demands of "free to me" is high deductibles which solves the immediate issues at the price of increasing the costs of those who failed to treat.
Still at around 8.5x future PE, it might be nicely discounted.
Aetna and CVS integration: Leadership & business culture might not be terrible as there isn't a lot of overlap. If a gold seller buys a smelter and a Miner there isn't a lot of redundancy to shed and as they are effectively different industries they must unite in propose but little else. A decline in drug reimbursement would still be a problem as would a sudden socialist shift in the government, the latter being rather unlikely.
The share price is also down over Amazon's healthcare news, but this should be short-lived because there's nothing to it.
My Thoughts
Insiders seem to be doing a right awesome job of selling at highs and accumulating near lows, funny how they can be so spot on when their sells and buys are alledgedly completely disconnected from their inside information. They accumulate below 61-64 and sell at all other times, notably reducing at prices over $78.
The US marketplace is already beset with the Moral Hazard from "free to me" healthcare and we are facing the backlash of high deductible plans. This is unlikely to end as constituents have insisted laws be passed to increase coverage to almost comical levels, where new mothers get two "free" breast pumps regardless of any considerations and often without a co-payment, so the breast pump buisness is great as manufacturers and resellers are able to name their price - is it any wonder that prices are out of control?
Lives cannot have infinite value either, but we continue to attempt to value them as such which also raises the price of health insurance as those whose deaths are inevitable consume the lions share of all of our available resources. We can't afford basic healthcare for little Jimmy because we can't bear to watch our parents die this week and prefer to have their suffering prolonged until their eventual death later this year. It's a sad state we've walked ourselves into as Americans. And it won't soon be rectified until we can face some hard truths, and I find the probability of that happening quite low.
In the meantime, we've found a backdoor solution - let's make it horrendously expensive for everyone from the word go! It's the perfect solution to the corner we've painted ourselves into. No matter, let's creating cost savings through Verticle integration. The path will be long, difficult, and uncertain, but perchance is lined in gold.
CVS is making a go of it. In addition to the recently settled, if we can call it that, Aetna deal CVS got an insurer, its previous acquisition of Caremark gave it a drug plan manager, all to add to its drug stores and what I presume are cheap walk-in clinics. While it will be positioned to steer its customers toward its own low-cost care, those who don't prefer it will likely move on to Wal-greens and the like. I don't actually believe CVS will see much increase in total services rendered with it's current infrastructure, all gains in the next few years from the business itself will likely be from the verticle integration while the appreciation of the stock price will come from a change in market sentiment about the future of businesses in CVS's position.
CVS isn't saying it's trying to do primary care but that's the short of vertical integration I'd want to see. There it would have the means to cut costs. As healthcare costs continue to rise low cost providers are likely to win, but I don't think this is it.
Conclusion
At a price under 64, and preferably toward $61, there's value in a trade here with a re-eval and likely sale as the share price approaches $80. This is supported by insiders own historic approach and the trend in volitility, however if the market doesn't bounce back in the first quarter and instead drops another 10+% that's going to be a problem.
CVS is not worth investing in, but priced around $61 looks like it has enough upside gain for the risk as a short term trade with a sale after it turns to the median.
Due Diligence - LH, LHCG, FMS, UNH
Due Diligence - LH, LHCG, FMS, UNH
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