Replies to post #380 on CVS Health Corporation (CVS)

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Getting some love finally--->>>CVS Climbed Higher, But The Stock Has Still A Long Way To Go
May 10, 2021 9:25 AM ET

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Summary

CVS reported quarterly earnings last week and not only could the company beat analysts' expectations, but the top line, as well as the bottom line, grew.

Despite a solid run in the last few months, the stock is still deeply undervalued and should be worth at least $135 in my opinion.

In the next few months, CVS should climb at least to $110 in my opinion as there is no real resistance levels.

I know, I covered CVS Health (CVS) quite often in the last few years. And my last article about CVS was published only about 3 months ago. But there is a reason I covered CVS so often and there is a reason I am writing about CVS once again.

The reason I covered CVS frequently in the past is quite simple: It was one of the most extreme bargains in this market and hence it made sense to remind everybody again and again about a potential investment in CVS. And in almost every article, in which I presented undervalued or recession-proof companies and stocks, CVS found its spot. CVS Health was deeply undervalued in my opinion and promised very high returns over the next few years. And finally, CVS is one of my major holdings at this point – another reason for me to watch the company closely.

In the last five days, CVS increased 11.40% (and in the “normal” investing world, this is a lot). The reason for this price movement was CVS’s last earnings report, which was released on Tuesday last week and the stock finally reacted how a stock should react after beating estimates and raising guidance: bullish! In the following article, we will look at the last quarterly results, we will look at the balance sheet and we will not only update our intrinsic value calculation but also look at the technical picture as CVS is at a decisive point right now.

Quarterly Results
Not only could CVS beat estimates for revenue and EPS, but it could also grow its top and bottom line. In the first quarter of 2021, CVS reported $69,097 million in revenue – an increase of 3.4% YoY. Diluted earnings per share (on a GAAP basis) were $1.68 – an increase of 9.8% YoY; adjusted earnings per share were $2.04 – an increase of 6.8% YoY.



(Source: CVS Q1/21 Earnings Presentation)

The company also raised its 2021 full year guidance and is now expecting GAAP diluted earnings per share to be between $6.24 and $6.36 (instead of $6.06 to $6.22 before). Adjusted earnings per share are expected to be even between $7.56 and $7.68.



(Source: CVS Q1/21 Earnings Presentation)

And finally, all three segments contributed to revenue growth. Sales from “Pharmacy Services Segment” increased 3.8% and revenue from “Health Care Benefits Segment” increased 6.7%. Only the “Retail/LTC segment” lagged a little bit behind and increased 2.3%.

Constantly Beating Estimates
When looking not only at the last quarter, but at several quarters, we see constantly increasing revenue. In most years, revenue increased in the low-to-mid-single digits. The high growth rates between Q1/19 and Q4/19 are the result of the Aetna acquisition. While revenue increased at a stable pace, diluted earnings per share fluctuated a bit more in the last 10 quarters.



(Source: Author’s work)

But while earnings per share fluctuated from quarter to quarter and revenue increased in every single quarter in the recent past, we should focus on another “statistic” that is much more important. For me, it was quite difficult to explain in the past, why the market kept assigning CVS such a low multiple. One simple explanation could be, that analysts are obviously underestimating CVS again and again – from quarter to quarter. This is leading to an impressive statistic: CVS could beat estimates for revenue as well as earnings per share for 21 quarters in a row. I don’t have any numbers or evaluations, but I would assume, that only a handful of companies is able to beat estimates for 12 quarters in a row.



(Source: Seeking Alpha Earnings)

We still have to assume, that the market will “wake up” at some point and might assign CVS the higher valuation multiples it deserves. And if that happens and analyst’s estimates will become more realistic again, we might also see a miss for revenue or earnings per share again.

Balance Sheet
One of the comprehensible reasons the market assigned CVS such a low multiple was the balance sheet and the rather high debt levels. But in the past few quarters, the balance sheet constantly improved. When just looking at the last three months, the balance sheet stayed more or less the same, but we see slight improvements. Total shareholder’s equity increased from $69.7 billion to $71.2 billion while total debt (short-term as well as long-term debt) stayed more or less the same. Right now, total debt is $59,522. This is leading to a debt-equity ratio of 0.84 – an acceptable number.

When comparing the total outstanding debt to the operating income CVS could generate annually, it would take about 4.25 years (when using the annual operating income of fiscal 2020 – about $14 billion). This number is not perfect, but still seems acceptable. And we also have to take into account $5.6 billion in cash and cash equivalents and $3.2 billion in short-term investments, that could be used to repay the outstanding debt.

I could understand if investors were worried about the rather high debt levels back in 2019, but now in 2021, the balance sheet should not be the reasons anymore to assign CVS a low multiple. And we should neither be worried about CVS’s solvency or liquidity.

Intrinsic Value Calculation
In my last article, I calculated an intrinsic value of $135.85 for CVS and I would still assume that number to be extremely reasonable, as the estimates I used are rather cautious. In my last article I wrote:

We can also calculate an intrinsic value by using a discount cash flow analysis. In this case, we have to make some assumptions. As a basis for 2021, we take the numbers from the company's own guidance and can expect a free cash flow of around $9 billion in 2021 (lower end of guidance). For past calculations, I always used a growth rate of 5% until perpetuity, which I will use once again. Considering that revenue will probably grow in the low-to-mid single digits and share buybacks alone could contribute in the mid-single digits to the bottom line, 5% growth seems to be absolutely realistic. When using these numbers, about 1,325 million outstanding shares (also according to guidance) and a 10% discount rate, we get an intrinsic value of $135.85 making the stock extremely undervalued at this point. And we have to call these estimates rather conservative, which is indicating an even higher intrinsic value for the stock.

And I can easily see the stock being worth $150-$175 – depending on the assumptions. And these are not unrealistic dream-scenarios, but growth assumptions that are in line with management’s expectations and past growth rates (and still include a margin of error).

Technical Picture
Not only is CVS still deeply undervalued in my opinion and could beat revenue as well as earnings per share expectations every single quarter during the last few years. CVS is also interesting from a technical point of view and we have a rather bullish scenario right now.

A few months ago, CVS already broke the declining trendline, which was in place since 2015 (orange line) and we already saw a pullback to that line. Additionally, CVS broke through another declining trendline, that has been in place since 2017 last week (red line). And the combination of good results and breaking the trendline made the stock rally last week. Right now, the stock is trading at the former highs around $84 (black line) and if CVS should manage to stay above this line, I don’t see many resistance levels in the foreseeable future and the stock should be able to rally to the former all-time highs (from 2015) at $110.



(Source: Finanzen.net Tradingdesk)

It Is Too Late Now, Right?
One of the mistakes I made in the past is looking at a stock, that has moved away from its former lows and assumed, that it is too late to invest right now. In the case of CVS, the stock is already trading 60% above its former lows and one could assume, that it is too late to invest in CVS now.

But that is nonsense in my opinion. As I have shown above, we are not only looking at a very bullish setup from a technical point of view, but the stock is also still deeply undervalued and probably has to double in order to be fairly valued. If that is not enough, we can look at some more metrics to demonstrate how “cheap” CVS is still is – despite the 60% increase. First of all, CVS is still trading about 25% below the former all-time highs set in 2015 and the stock price has lagged for several years despite a solid fundamental business.

Chart
Data by YCharts
During the last six years, diluted earnings per share increased 45.7%, revenue increased 86.2% in the same timeframe and free cash flow increased even 199% since May 2015. But the stock price decreased 13.9% in these six years and this is demonstrating the huge discrepancy between fundamental business and stock and is also underlining, that CVS is not really trading for its fair value.

Chart
Data by YCharts
We can also look at the price-earnings ratio, which is about 15 right now. Not only is the P/E ratio still below the 10-year average P/E ratio of 17, but we are still way below the highs set during the last decade (a P/E ratio of 27.40) and calling the stock expensive is just not true.

Chart
Data by YCharts
Additionally, we can look at the price-cash-flow ratio. Right now, this ratio is at 8.7, which is not only extremely cheap compared to most other stocks, but also way below the 10-year median of 13.20 and far away from the highs set during the last decade (27.9).

Conclusion
CVS is still an extremely undervalued stock, and the market seems to realize this slowly and is beginning to price to stock more accurately. And while one might make the mistake and assume it is too late to invest in CVS (as the stock has increased already 60% in value from the previous lows), the stock can almost double in value again and would still not be overvalued (in my opinion). And not only the stock price will most likely increase, but CVS will also increase the dividend again (probably in 2022) and reward investors this way. CVS is still one of the best picks in this market and it is not too late to buy a high-quality, recession-proof and undervalued stock.