CVS (CVS, Financial) looks to continue to grow earnings and revenues with the aging demographic and building of new locations. The company acquired Target’s (TGT, Financial) pharmacies last year. The stock is reasonably priced, and earnings keep going.
CVS has a market cap of $95.7 billion. It trades at a trailing price-earnings (P/E) ratio of 20.65 and a forward PE of 13.64. The forward dividend yield is 1.87%. The return on equity is an outstanding 13.37%. CVS’ trailing 12-month free cash flow yield is 7.25%. That’s amazing. With that free cash flow, the company has been issuing its dividend and buying back shares.
As you probably know, CVS is a retailer with liquor, beer, photography development, candy, junk food, soda pop and all of the goodies that we need –Â except for cigarettes. CVS 86’d cigarettes two years ago. But the most important division is the pharmacy. Growth has been crazy. Sales were $126.7 billion in 2013, $139.4 billion in 2014 and $153.3 billion in 2015.
The balance sheet is pretty decent. There is $1.2 billion in cash, $13.1 billion in receivables and $14.1 billion in inventories. This is to $7.35 billion in payables, $8.9 billion in claims and $28.6 billion in debt.
The Target acquisition in December 2015 should be accretive. CVS acquired all of Target’s pharmacies for $1.9 billion. This equaled 1,672 in 47 states at the time. In the latest quarter, CVS opened 10 net new stores and two onsite pharmacies and now has 9,652 locations including Target. In the first quarter, CVS opened 19 new stores. I’m a big proponent of only investing in retail when the company is expanding locations.
As a customer, I’ve really enjoyed the MinuteClinic. There are 1,136 walk-ins throughout the U.S., but not all stores have one. Perhaps this is a place for growth. There might be growth potential at Target, too.
Barron’s asks a good question about pharmacy benefit managers (PBM). These are companies like CVS and Express Scripts (ESRX, Financial). PBMs decide what is generic and what is name brand. Express Scripts is in a large lawsuit with Anthem (ANTM, Financial) for allegedly overcharging customers. This could kill the golden goose. CVS receives 39% of its operating income from PBMs.
I can’t seem to find anything wrong with CVS. My only concern is trees don’t grow to the sky – someday this growth in health care spending has to plateau. It doesn’t seem to have happened yet.
Disclosure: We own none of the stocks mentioned.
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