At CVS Health, we share a clear purpose: helping people on their path to better health. Through our health services, plans and community pharmacists, we’re pioneering a bold new approach to total health. Making quality care more affordable, accessible, simple and seamless, to not only help people get well, but help them stay well in body, mind and spirit.

Cy Lynch warned all of us as he selected CVS Health (CVS) again for the February Round Table. CVS now ranks as the 2nd most frequently selected company for the tracking portfolio. Cy’s warnings? (1) You can’t lean on the rear view mirror for this one. The historical data doesn’t include Aetna. (2) The fear and herd-following among the Rhinos has delivered some painful price action. [Note: The Rhinos just could be right.] (3) CVS is undergoing a high risk (general perception) transformation from the current business model to one that seeks to optimize wellness, decrease dependency on pharmaceutical band-aids (!!!) and fight to establish an effective go-to solution that serves customers with a cost effective path to health.

The Wind Is Blowing

Reference: Looking Ahead: 2019 Health Care Trends

Business Model Analysis (Sales)

CVS Health. Pro Forma Sales Projections. As Cy suggested, the company has shifted. The step change in sales due to the addition of Aetna can be seen in 2018. The growth rate (slope of the trend line) from 2010-2017 is visually different from the slope seen for 2018-2023. The former trend (10-12%) no longer applies to a stock study of the new CVS. It’s supporting information for what may be possible — but the growth rate suggested in the SEC filings is 6-7%. (Value Line has a much more pessimistic outlook for the 3-5 year forecast — resulting in a growth forecast of 4.5%)

The profitability forecast (according to CVS and the legions of Rhinos who chimed and rhymed with opinions about the Aetna deal) is available here also. Dividing the net income in 2022 into the the sales forecast, we see (11.6/333.4) = 0.035 = 3.5%

… And Now, The Rest Of The Story

My personal opinion is that it boils down to remembering and realizing that CVS is the company that discontinued the sale of cigarettes a few years ago to a chorus of whining and Armageddon commentary from the Rhinos.

This is massively challenging but a mission with merit. This core holding — at least temporarily — has shifted from blue chip stalwart to execution-based speculation. But it’s a good speculation based on the promises delivered by excellent management over the past several years. The investing jungle is full of doubting Rhinos and the stock price has been mightily challenged, accordingly. That said, the expectations (4% growth, 3.5% profitability, 11.5x average P/E) are the types of low bars that investors like Graham and Buffett have vision cast as stepping over them while others assail the assortment of 7-foot high jump bars with other opportunities.

Imagine them ripping out the chips and candy and recapturing the space with cost-effective access to doctors, physician’s assistants, nurse practitioners and various flavors of therapists and nutritional campaigns. Imagine America taking a few less pills and feeling comprehensively better. CVS ripped out the smoking products. How challenging is it to believe that they just might be serious about the rest of this?

References

• CVS — This Is Disgusting (Quad 7 Capital, Seeking Alpha)
• Why CVS Stock Fell 12% Last Month (Jeremy Bowman, Motley Fool)
• S-4 Registration Statement (SEC file — January 4, 2018)
• Top 8 Healthcare Predictions For 2019 (Forbes, November 13, 2018)
• Larry Merlo at National Press Club: Improving Health Community By Community

Questions?

Contact Mark Robertson via markr@manifestinvesting.com or via Twitter by reaching out to @manifestinvest.  Manifest Investing also maintains a “slipstream blog” at Facebook: https://www.facebook.com/manifestinvesting/  Comments and inquiries welcome.