CVS Health Corp (CVS)

The problem they’ve run into is a controversy about pharmaceutical benefits management, and what is going to happen with the intermediary companies. The problem is that Trump and some congressmen feel that what they are doing raises the price of drugs for other people. In the meantime, they are running a huge chain of drugstores, and increasingly, home-based medical care. He thinks the pharmaceutical benefits thing will blow over. He is still a buyer.

A pharmaceutical company, long-term care company and a consulting services company. Has a free cash flow yield of about 7%. The CVS business is a good solid business with lots of cash. There are only 2 competitors in the US drug store business. There has been a little slippage on same-store sales, but feels they have straightened that out. Their long-term care business is really important, and he thinks there is good growth here. Thinks the stock is worth around $95. Yield of 2.4%. (Analysts’ price target is $87.50.)

He used to believe it was worth hanging onto, but he has moved on. It is stuck in limbo. The question is what the margins will look like.

This had issues when they became an insurance company and a drugstore. They also went into the UK and bought Boots. The conflict of interest between being a healthcare provider and trying to get people to go to your store has hit it. A solid business and is not going away.

A kind of integrated health care company. It is a pharmacy and has a long-term care business. Trades at 13X earnings. The stock has pulled off from its highs. Has a free cash flow yield of about 7%. They’ve had some issues on the same store sales side over the last while, and he thinks that is stabilizing. On the healthcare side, they need to make a few more acquisitions. Thinks the intrinsic value is somewhere between $90 and $95. Dividend yield of 2.6%. (Analysts’ price target is $87.50.)

(A Top Pick March 10/16. Down 20%.) This is the leading drugstore in the US on the retail side. Last fall, their scripts got excluded from the PBM networks, so they are losing some prescription volumes, which is a short-term negative. Earnings are going to be somewhat flat this year, but they feel they can continue growing earnings at a 10% rate past 2017. She likes the space. Their competitor, Walgreens (WBA-Q), is in the process of acquiring Rite Aid (RAD-N), so expects CVS will pick up some stores at that time. Trading at about 2 multiples discount to Walgreens because of their near term earnings stumble. Thinks the disappointment is already priced into the stock.

There is retail and pharma benefits managment. It does not meet his criteria. It has not broken out. The PBM is facing pressure. Their fees are a percent, which is riskier. Their fundamentals don’t line up. There are better places to put money.

A really great company with a successful long-term track record, which should continue in the future. A couple of things have taken the stock down. Walgreens (WBA-Q) had a new deal, which was going to eat into the market share, so of course the stock took a bit of a hit. Also, there is the potential legislation on repricing of drugs. The whole drug chain is probably susceptible to some repricing. Thinks these 2 things are already priced in.

A big fan. The healthcare sector is cheap. This one has a tremendous free cash flow yield. They pretty much have the market all to themselves, and he likes markets where there aren’t very many competitors. (See Top Picks.)

They have a huge platform of pharmacies in the US, pharma benefits management and home healthcare. The baby boomer generation is not going to suddenly not need their pills any more. It is very cheap right now. (Analysts’ target: $86.34).

Valuation has come back into line. They have retail which had some good comps for a while, but people are not spending as much in the store right now. Also, they are losing share to Walgreens (WBA-Q).

(Top Pick Jan 21/16, Down 13.41%) Many of the comments he made about WBA-N apply here. People are waiting to see the dust settle. These companies continue to do well. They are a good place to be patient. Just because you are not rewarded on price does not mean you are happy with the fundamentals. Trade less rather than more.

The 2^nd largest drugstore in the US, but also a PBM, (Pharmacy Benefit Manager). PBM’s are a little misunderstood in the US. They were set up because corporations didn’t want to deal with managing employees’ drug benefits. PBM’s actually save companies money. Depending on the contract, they can pass through 85%-100% of their money. CVS is going to buy back about 5 billion of shares. Good dividend growth rate and free cash flow. This is trading much lower than the market. Dividend yield of 2.44%. (Analysts’ price target is $88.74.)

This pulled back because it had to reduce its earnings guidance for this upcoming year. They had been guiding for 10%-14% growth for the next few years, and have had to reduce that to 10% going forward. This is because their drug retail side has been excluded in certain pharmacy networks. The valuation is very attractive at about 13 or 14 times forward earnings. A well-managed company.

He is a believer in this company, both the stores and the home delivery product, and believes that the stock will come back.