قالب وردپرس درنا توس
Home / Business / CVS Health: Patience Warranted – CVS Health Corporation (NYSE:CVS)

CVS Health: Patience Warranted – CVS Health Corporation (NYSE:CVS)



Surprisingly, CVS Health (CVS) lost 50% of its value from trading above $ 110 way back in 2015. The pharmaceutical company has just completed a major merger with Aetna fueled by the debt and no surprise the stock is hitting new multi-year lows. Large loads of debt and a confusing business model lays the groundwork for an opportunity in a downed stock.

  CVS Health logo

Source image: CVS Health website

Hard To Manage

While CVS Health can promote integration Health care solutions derived from the addition of the business of # & # 39; Aetna health care, the company cannot change the impressive scale of a company that now has $ 250 billion in annual revenue. The new business includes a massive retail operation that includes 10,000 pharmacies, a pharmacy benefit manager at Caremark and a health benefits manager in Aetna.

Adding massive amounts of debt makes little room for error in a complex business to navigate, particularly with the government expanding efforts to reduce drug prices. The company is uniquely positioned to address medical cost saving opportunities, but CVS Health does not necessarily seem to benefit from this scenario as the government wants some intermediaries to take the shot at providing savings to the industry.



Source: CVS Health Presentation Q4 & # 39; 18

So, on the one hand, the company sounds like the leader of the future in the health sector, providing improvements in results health at lower costs. For CEO Larry Merlo on the fourth-quarter earnings request:

CVS Health is in a superior position to drive the needed change in the US healthcare system fragmented with our fully integrated and compelling health offerings, our unparalleled local community resources, proven leadership in the care of pharmacies and a commitment to work with healthcare professionals to achieve the best results for the patients and clients we serve.

On the other hand, the company does not see any of the benefits as many people want to see the $ 15 billion in operating income from CVS Health redistributed to other people in the health system, including mainly the savings for patients. As such, the company listed the following reasons for the success of the EPS in 2019:

  • The decline in the benefit of generic drugs.
  • Inflation on lower brand drugs.
  • Ongoing questions related to drug reimbursements.
  • Specific challenges of CVS in the long -term care space.

The end result is that previous CVS units are forecasting a decline in operating income. Retail business forecasts a 10% drop to ~ $ 6.65 billion and the pharmacy services group forecasts a decline in low figures to ~ $ 4.88 billion

The end result is a mega merger that does not see Expected results as the company used the purchase of Aetna to hide the weakness of legacy activities or CVS Health lost attention on those companies during the merger.

Keep It Simple

Where the title becomes interesting, the company keeps the game plan simple. CVS Health has substantially expanded the debt level in recent years with a net debt of nearly $ 67 billion and costs the company over $ 3 billion in annual interest costs

  Chart

YCharts data

The company expects about $ 15 billion in operating income in 2019, so the level of debt is not a problem of leverage, but rather a strategic nightmare for a company that cannot hit financial targets with massive assets.

Simply, CVS Health must repay the debt and demonstrate the model in which offering more primary care services in the stores through the MinuteClinic is a winning strategy. Based on these first results, the main concern is that the main customers who use these services are those that are cost-conscious and are looking for a good deal. There is a big difference between being the company that offers the healthcare solutions desired by patients and the offer of profitable services that these patients need.

The company expects 2019 free cash flows in the $ 7.5 billion range with extra cash after paying around $ 2 billion in annual dividends to repay the debt. CVS Health has a ton of short-term maturities that are not a major concern for this cash flow business, but the company still has to eliminate the risk through debt repayments and refinance other maturities.



Source: CVS Health Presentation Q4 & # 39; 18

The unknown here is where EPS estimates are at a minimum. The trend remains highly negative bringing the stock into a value trap scenario until the management team manages to manage the huge business.

  Chart

YCharts data

Takeaway

The main point of support of the investor is that CVS Health is a securities trading with clear values ​​at 8.3×19 of EPS estimates of $ 6.78. The company must demonstrate that a difficult business to manage is actually manageable while substantial debt levels are paid off.

More patience is needed before rushing into this potential value trap. Once the negative trend for EPS is reversed, the stock will be a purchase.

Disclosure: I do not have / have no positions in any of the mentioned names and we have no plans to start any position within the next 72 hours. I wrote this article alone, and expresses my opinions. I'm not getting compensation for this (other than Seeking Alpha). I have no business relationship with any company whose title is mentioned in this article.

Further information: Disclaimer: The information contained in this document is for informational purposes only. Nothing in this article should be taken as a solicitation to buy or sell securities. Before buying or selling shares, you should do your research and reach your conclusion or consult a financial advisor. The investment includes risks, including the loss of capital.


Source link