A city may not be complete if a CVS (CVS, Financial) pharmacy store cannot be located. Its presence in almost all cities here in Texas made me wonder if it does good business and if it is currently at a good value when compared to its peers.
Four facts about CVS pharmacy:
- Second-largest drug store chain in the U.S. with $45.6 billion in prescription sales in 2014.
- CVS has over 7,800 stores nationwide. Walgreens Boots Alliance has (WBA, Financial) 13,100 stores (plus Rite Aid after acquisition).
- CVS has stopped selling tobacco products as of Sept. 3, 2014. CVS forecasted that the tobacco sales ban would hit its revenue by $2 billion.
- CVS has just completed its acquisition of Target’s (TGT, Financial) 1,672 pharmacies across 47 states on Dec. 16, 2015.Â
- Walgreens Boots Alliance, a close CVS Pharmacy competitor, has announced a $9.4 billion acquisition of the third-largest drug chain in the U.S., which is Rite Aid, in October 2015. The acquisition boosted Walgreens Boots Alliance stores from 8,200 locations into more than 12,000.Ă‚
The numbers
Sales
CVS Pharmacy leads the three big drug chains in terms of overall sales.
Sales growth
Walgreens Boots Alliance and Cardinal sales growth have outpaced CVS’ in recent years. Should the halting of tobacco sales be to blame for CVS’ below peer average growth? Nevertheless, CVS’ revenue growth of 10% (or more) accompanied by $120 billion annual sales should not be labeled as sub-par.
Profit margin
Walgreens Boots Alliance appeared to be more profitable than CVS Pharmacy at this chart.
However, 10-year profit margin average revealed that the top two drug chains are neck and neck, earning about 3 cents per dollar revenue.
Debt to equity ratio
Increase of debt uptake noticed in the three leading drug chains in 2015.
Total debt
Both Walgreens Boots Alliance and CVS Pharmacy have massively increased their debt levels in 2015 from 2014 by 260% and 124%, respectively.
Shareholder return (dividends and share buybacks)
CVS Pharmacy, no doubt, has better served its shareholders for the past decade compared to Walgreens Boots Alliance and Cardinal Health.
Free cash flow
Percent of shareholder return/owner’s earnings
CVS Pharmacy, despite its low current dividend yield of 1.74% and buyback yield of 4.6%, has been paying out its shareholders more than 100% of its free cash flow. For a conservative investor, I would rather expect a range between 50% to 70% total payout ratio with free cash flow.
Percentage of shareholder return/profit
This >100% total payout ratio was further observed when dividends and share buybacks were taken away from CVS’ profits over the past five years.
Intrinsic value calculations
Source: Yahoo Finance.
Using forward earnings per share with a simple multiples formula revealed that the current share price of CVS Pharmacy is overpriced by about 19%.
Using analysts’ growth estimate of 12.5% for next year and applying it to my free cash flow growth revealed that the current price of CVS Pharmacy is still overvalued by 31%.
*Other data included in the formulation not shown in the picture were as follows: 10-year treasury rate was used as the risk free rate, beta used were averaged from Reuters, Google Finance, Yahoo Finance, and Financial Times, recent quarterly data was used for total debt and equity, equity risk premium was based on Professor Aswath Damodaran’s NYU Stern data, tax rate used was 39%.
My average intrinsic value for CVS Pharmacy would be $73.10 per share with a buy price of $51 per share (30% margin of safety). Nevertheless, CVS’ share price has never been at that level since February 2013, and I do not believe that it will ever reach that price any time soon, except when a recession hits.
Additional data
Dividend yield
Price to earnings ratio
Happy Investing!
Mark
