CVS Pharmacy

CVS Health Corp (CVS) – Buy

I initiated a new position today in CVS Health Corp (CVS) at $61.84. It is our 10th largest position at this time.

Reason for current opportunity

  • The share price for CVS has been under pressure because of a variety of threats:
  • Companies like Amazon entering their markets and perhaps trying to remove the profit from the industry.
  • Political pressure to decrease drug costs and regulate drugs/insurance.
  • Shareholder belief that CVS is overpaying for Aetna destroying shareholder value.

Why CVS?

CVS has been on my watch list for a while as it’s become an increasingly good value. Most people know CVS for their CVS Pharmacy retail stores. However, the company is looking to become much more. Through various acquisitions, they are morphing into a more complete healthcare services company that includes benefits management, health insurance, retail pharmacy stores and clinics. CVS purchased Caremark (prescription benefit management) and intends to purchase Aetna (managed health care/ health insurance). CVS also operates MinuteClinic (retail clinics).

This makes for a great opportunity for CVS to use it’s negotiating power and to increase efficiencies in order to provide lower cost healthcare products/services than their competitors as well providing a one-stop solution to customers.

Valuation

CVS currently trades at a:

  • 9.7 forward PE
  • forward earnings yield of 11%
  • PEG of 1
  • PEG payback in years is 6.1
  • dividend yield is 3.2%

These numbers are significantly better than the industry average and the healthcare industry should continue to grow from here.

I believe the current stock price drop represents a great opportunity for those not currently invested or with a small position in CVS. If the price should continue to drop, I will most likely add to this initial position.