CVS - CVS Health Corporation

[DooDiligence]

This is why nobody should ever let me run money for them  :-X

[KCLarkin]

The problem for CVS in the last quarter wasn’t with Aetna, it was with CVS core business (PBM and retail)

 

Both adjusted claims and prescription volumes grew nicely. Both are forecasted to grow next year. So they are selling more units but with worse margins. Whether they can stabilize margins is an open question. They are investing heavily in the health superstore concept, so I would expect continued margin erosion. They are also investing in the Anthem ramp-up.

 

I would be interested to see what sort of lift Anthem will give CVS in 2020.

 

The ongoing political pressure on drug pricing and rebates will continue to hurt CVS multiple and revenue.

 

The integration with Aetna is another x-factor. My guess is that there will be a very large write-down in the next 5 years, but can Aetna grow enough to offset the pricing pressure in pharmacy and PBM?

 

If they can somehow stabilize the business, this looks like a homerun. UNH trades for 20x. Surely CVS could get up to 12x? But the market obviously believes that the business won't stabilize.

 

Probably too close to call. Seems like a reasonable bet but the high debt makes this much riskier than it was before the merger.

[Cigarbutt]

This is why nobody should ever let me run money for them  :-X

I plan to let this one slip away from the radar but the industry is interesting and would like to read your thoughts if you hold this one for the long run.

 

This 2018 reference may be useful:

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5973245/

[DooDiligence]

This is why nobody should ever let me run money for them  :-X

I plan to let this one slip away from the radar but the industry is interesting and would like to read your thoughts if you hold this one for the long run.

 

This 2018 reference may be useful:

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5973245/

 

I go with my gut a lot of the time.

Gut + my version of doo diligence.

The doo stands for doo.

As in doo doo.

 

I am very appreciative of the time you take to educate me.

 

I feel like my decisions are going to get better

because I'm paying attention to possible downside

(and stagnation)

instead of just building pie in the sky scenarios.

 

Sometimes I see things differently.

 

I saw something in Amerisource-Bergen until the compounding debacle made it obvious to me that management sucks.

I saw something in SoftBank until I realized that it was way too complicated for me to really see anything.

 

I kind of wish that all I owned was BRK, BBH, CHTR, DIS, DVA, EW, GPC, NVO, VDE

(heavier on the BRK & DIS)

but I'm going to let all the others play out a bit.

 

Real estate is looking better & better.

[Spekulatius]

After reviewing CVS a bit, as well as other players in this sector, I would be more comfortable buying WBA than CVS, as I think WBA is better run, has a single focus and much less debt. I don’t own the stock yet, but I think it looks interesting, with an ~11x PE (backing out amortization expenses).

 

I do own some MCK purchased recently and think it is a nice defensive pick, despite the negative headlines from the opioid issue. I also think that there is a chance that these wholesalers (ABC, MCK, CAH) will get bought up, if the trend indeed goes towards integration.

 

 

Just from my experiences, it seems that at times, sectors of the health care sector become quite cheap. I recall pharmaceuticals being cheap, health insurers a couple of years ago and now distributors and pharmacies. In all these cases that I recall, the sectors that wer cheap seemed to have come back quite nicely, as Mr. Market seemed to have overestimated the trajectory of change and a reversal to the mean bet would have worked. this may be a similar type of situation where the wholesalers and the pharmacies have become too cheap and will revert to the mean as well.

[DooDiligence]

After reviewing CVS a bit, as well as other players in this sector, I would be more comfortable buying WBA than CVS, as I think WBA is better run, has a single focus and much less debt. I don’t own the stock yet, but I think it looks interesting, with an ~11x PE (backing out amortization expenses).

 

I do own some MCK purchased recently and think it is a nice defensive pick, despite the negative headlines from the opioid issue. I also think that there is a chance that these wholesalers (ABC, MCK, CAH) will get bought up, if the trend indeed goes towards integration.

 

 

Just from my experiences, it seems that at times, sectors of the health care sector become quite cheap. I recall pharmaceuticals being cheap, health insurers a couple of years ago and now distributors and pharmacies. In all these cases that I recall, the sectors that wer cheap seemed to have come back quite nicely, as Mr. Market seemed to have overestimated the trajectory of change and a reversal to the mean bet would have worked. this may be a similar type of situation where the wholesalers and the pharmacies have become too cheap and will revert to the mean as well.

 

I've always wanted to own a health insurer but they seem perpetually expensive.

 

I bought CVS before they announced the Aetna deal.

 

I got my wish, for better or worse.

[Spekulatius]

The problem for CVS in the last quarter wasn’t with Aetna, it was with CVS core business (PBM and retail)

 

Both adjusted claims and prescription volumes grew nicely. Both are forecasted to grow next year. So they are selling more units but with worse margins. Whether they can stabilize margins is an open question. They are investing heavily in the health superstore concept, so I would expect continued margin erosion. They are also investing in the Anthem ramp-up.

 

I would be interested to see what sort of lift Anthem will give CVS in 2020.

 

The ongoing political pressure on drug pricing and rebates will continue to hurt CVS multiple and revenue.

 

The integration with Aetna is another x-factor. My guess is that there will be a very large write-down in the next 5 years, but can Aetna grow enough to offset the pricing pressure in pharmacy and PBM?

 

If they can somehow stabilize the business, this looks like a homerun. UNH trades for 20x. Surely CVS could get up to 12x? But the market obviously believes that the business won't stabilize.

 

Probably too close to call. Seems like a reasonable bet but the high debt makes this much riskier than it was before the merger.

 

Looks like the multiples for health care insurers are rapidly coming down. I am really surprised they went for 20x earnings to begin with. UNH trades for 8-10x earnings for a long period of time. Looks like CVS got into this business right at the top. I can see already a KHC sized goodwill write off in the next few years.

[DooDiligence]

The problem for CVS in the last quarter wasn’t with Aetna, it was with CVS core business (PBM and retail)

 

Both adjusted claims and prescription volumes grew nicely. Both are forecasted to grow next year. So they are selling more units but with worse margins. Whether they can stabilize margins is an open question. They are investing heavily in the health superstore concept, so I would expect continued margin erosion. They are also investing in the Anthem ramp-up.

 

I would be interested to see what sort of lift Anthem will give CVS in 2020.

 

The ongoing political pressure on drug pricing and rebates will continue to hurt CVS multiple and revenue.

 

The integration with Aetna is another x-factor. My guess is that there will be a very large write-down in the next 5 years, but can Aetna grow enough to offset the pricing pressure in pharmacy and PBM?

 

If they can somehow stabilize the business, this looks like a homerun. UNH trades for 20x. Surely CVS could get up to 12x? But the market obviously believes that the business won't stabilize.

 

Probably too close to call. Seems like a reasonable bet but the high debt makes this much riskier than it was before the merger.

 

Looks like the multiples for health care insurers are rapidly coming down. I am really surprised they went for 20x earnings to begin with. UNH trades for 8-10x earnings for a long period of time. Looks like CVS got into this business right at the top. I can see already a KHC sized goodwill write off in the next few years.

 

yep

[Spekulatius]

If I owned CVS and fon’t Like their integrated health care approach, I would just sell and buy WBA instead. FWIW, I just bought a starter in WBA today in today’s mini crash.

[DooDiligence]

If I owned CVS and fon’t Like their integrated health care approach, I would just sell and buy WBA instead. FWIW, I just bought a starter in WBA today in today’s mini crash.

 

I believe their approach could work.

 

I also believe what you said about a big write-down in the future.

[Spekulatius]

If I owned CVS and fon’t Like their integrated health care approach, I would just sell and buy WBA instead. FWIW, I just bought a starter in WBA today in today’s mini crash.

 

I believe their approach could work.

 

I also believe what you said about a big write-down in the future.

 

Yes, CVS approach could work, but there is a whole lot more risk both from an execution and balance sheet angle compared to WBA. If you like the retailing side, there is no reason to stick with CVS when you can buy a pure play at a similar valuation ( adjusted by leverage). I always try to isolate a long thesis from its expression.

[dwy000]

If I owned CVS and fon’t Like their integrated health care approach, I would just sell and buy WBA instead. FWIW, I just bought a starter in WBA today in today’s mini crash.

 

I believe their approach could work.

 

I also believe what you said about a big write-down in the future.

 

Yes, CVS approach could work, but there is a whole lot more risk both from an execution and balance sheet angle compared to WBA. If you like the retailing side, there is no reason to stick with CVS when you can buy a pure play at a similar valuation ( adjusted by leverage). I always try to isolate a long thesis from its expression.

 

WBA is a much better retailer.  And better managed.  CVS gives some protection against things that hit WBA today like rebate pressure because they are now on both sides of that payment.  But the tradeoff for that is huge leverage and the issues that come from the PBM and payer side in an uncertain healthcare market.  From a retail perspective though, having a rational oligopoly in an area that is only going to grow is not a bad thing whichever player you back.

[DooDiligence]

I agree with both of you & thanks for making your argument against CVS clear to me.

 

I've been too busy staring at the trees to see the potential for the forest getting clearcut.

[Gregmal]

This has gotten interesting IMO. All that was already discussed here aside, I think potentially having $10B in FCF during their "transition" year is pretty impressive. Shorter term debt maturities aren't overwhelming and should easily be covered by FCF in excess of payout.

 

My question to those that follow; what do you guys think of management?

 

 

[dwy000]

This has gotten interesting IMO. All that was already discussed here aside, I think potentially having $10B in FCF during their "transition" year is pretty impressive. Shorter term debt maturities aren't overwhelming and should easily be covered by FCF in excess of payout.

 

My question to those that follow; what do you guys think of management?

 

I will probably get lambasted for it but I like Merlo.  There are certainly faults (overpaying for acquisitions being the foremost) but I think the very long term vision for CVS's role in the future of healthcare is ahead of most others. They are more diversified and vertically integrated now and while they are not as good at retailing at Walgreens, that is becoming a smaller component of the business.  Given the breadth of the businesses now I think his key role is making sure the people running the 3 businesses are the best out there. Again though, this is an oligopoly right now with huge tailwinds so hopefully it is becoming a business that can overcome weak management even if that's the case.

[Gregmal]

This has gotten interesting IMO. All that was already discussed here aside, I think potentially having $10B in FCF during their "transition" year is pretty impressive. Shorter term debt maturities aren't overwhelming and should easily be covered by FCF in excess of payout.

 

My question to those that follow; what do you guys think of management?

 

I will probably get lambasted for it but I like Merlo.  There are certainly faults (overpaying for acquisitions being the foremost) but I think the very long term vision for CVS's role in the future of healthcare is ahead of most others. They are more diversified and vertically integrated now and while they are not as good at retailing at Walgreens, that is becoming a smaller component of the business.  Given the breadth of the businesses now I think his key role is making sure the people running the 3 businesses are the best out there. Again though, this is an oligopoly right now with huge tailwinds so hopefully it is becoming a business that can overcome weak management even if that's the case.

 

Thanks. Yea I kind of agree with this. From the outside this kind of seems like a business that is good enough to negate the effects of a less than stellar manager. I'm trying to hunker down and determine whether this outside view is concrete enough to base an investment on it.

 

I agree WBA is better at the retail end of things but frankly dont think this will be too much of an advantage for too long. There are only so many places where you can charge $2.50 of a 2-liter of soda or 30% more on grab and go products that are much cheaper at other stores or online. So I see that advantage eventually going away. I think CVS decided to give this up when they stopped selling cigarettes.

 

My ideal scenario is they take this year to smooth things out, pay down some debt, and then just spit out cash like a broken ATM. We will see.

[KCLarkin]

https://www.barrons.com/articles/cvs-stock-health-care-51555105435?mod=hp_HERO

[dwy000]

Fantastic results today.  The cash machine is spitting out dough.  Over $10bn of cash flow projected for this year (a transition year too) on a $70bn market cap. 

[Spekulatius]

Interesting, the stock price is back to square one (recent lows). The doubt run deep for sure. Bought some.

 

I like the transformation in the stores I have been seeing. Minute clinics next to entry. Increased the space for the prescription counter / consulting section and trimmed merchandise.

[valuedontlie]

the cash flow looks appealing on the surface... ~$10bn op cash flow less ~$2.5bn capex = $7.5bn FCF...

 

isn't there some concern over the degradation of the business here? AET was doing $3.5bn+ op cash flow each year pretty consistently prior to merger and CVS was ~$8bn per year realm... now it's $10bn combined? and this is with part of the synergy goals...

[dwy000]

Dont forget there is an extra $1bn of interest expense to fund the acquisition, the integration expenses for 2019 and the hit they are taking on the LTC business this year (which, yes, is a degradation of the business).  Management has beenvery explicit that 2019 is a restructuring year.

 

That's not to underplay your point.  The retail and PBM margins are under pressure and theres always questions about where the payer business is going.  But I like the industry and demographic tailwinds, the oligopoly market, the consolidating payer market and the combined business model.  And most of all the price today

[dwy000]

If there's a better source for in depth analysis on drug spend and the channel as a whole (retail pharma, payers, PBM's, etc - and the interplay between them) I've yet to find it.

 

Great summary today on the spend by PBM's on drugs overall and the breakdown between unit vs. price. 

 

https://www.drugchannels.net/2019/05/which-pbm-best-managed-drug-spending-in.html#more

[KCLarkin]

Wow...trump admin cancels plans to eliminate drug rebates:

 

https://www.cnbc.com/2019/07/11/white-house-pulls-proposal-to-eliminate-drug-rebates-politico.html

[Saluki]

Wow...trump admin cancels plans to eliminate drug rebates:

 

https://www.cnbc.com/2019/07/11/white-house-pulls-proposal-to-eliminate-drug-rebates-politico.html

 

I own some BHC so it should get a nice pop today.  It was unexpected, but I'll take it. 

[wolverine890]

After this morning announcement it doesn't seem like the pressures the market thought the company would face are coming to fruition. If CVS earns the midpoint of the new guidance ($6.89-$7.00) the company is trading at ~7.8x adjusted EPS. CFFO was also raised to $10.1-$10.6B. Seemed strong to me and the stock seems cheap.

 

Pharmacy Service grew by 4.2%, same store sales grew by 4.2%.