Description

Given all the carnage on the street, we have been anxious to find a home. Forgive the brevity of the writeup but given an assumed familiarity with the name we wanted to stress the compelling case for CVS against a tough macro landscape coupled with the uncertainty surrounding covid-19.

During this year, Karen and the company have raised guidance, dividends and share buybacks. Just for context at the last investor day:

$10 bb share repurchase program and raises dividend

EPS for ’22 guided to range of $8.1 - $8.3

Raises ’21 EPS guide to at least $8 (from $7.9 - $8)

Since then:

Analyst price targets followed suit

In times of uncertainty you want to find managers that know how to run businesses. Insert whatever business quote you see fit, but Rahm Emanuel’s is just as good as anybody’s: You never let a serious crisis go to waste. I don’t know if we are there yet or how you want to term the current landscape, but there is clearly blood in the streets and small cap just seems to get obliterated daily. We’ve seen what can happen with a name like $aapl. Our view is that its being appreciated as a flight to safety. We share the board’s sentiments that we aren’t super enthusiastic about jumping into Apple’s highest multiple on the heels of what could be somewhat tepid demand for its core products. Great, they may have glasses or a car or services expansion. Anyway, I digress…here’s your fearless leader if you have time:

https://www.youtube.com/watch?v=sMR2aXUMz1s&ab_channel=NewCo

The point here is that the company has focus. It has clearly proven that it can manage and successfully paydown its debt load.

By the way, aren’t you supposed to be holding debt in inflationary times?

We find the risks of Aetna integration and Amazon disruption (company using physical stores as a strength) to at least partially be in the rear view mirror and if anything a better risk reward than at any other time in CVS’s history. With its 3 pronged offering (Retail, PBM, and Managed Care), CVS now controls a very lucrative ecosystem that provides defense and offense at the same time.

Oh, and just in case you are a SAAS boy, we have a little offering called Carepass. This is the company’s digital delivery service. For context Q1 report was greater than 80% increase in visits to digital properties yoy. Q2 and Q3 reported 35 mm unique digital customers. Hard to underwrite this part of the business given the company doesn’t break this out completely but we see it as a defensive play for the company as its primary value to the market is the complete saturation of locations the company offers.

We do view perhaps a cyclical risk in the name given its conspicuous home in a very medical focused year. That being said, the company performed beautifully.

We view this as less central to the overall thesis of a growing cash flow and declining enterprise value / share count.

The company has guided to maintaining debt levels at low 3x leverage. As debt continues to be paid down (paid down $6.5 BB ytd), shares devoured and yield increased, we can’t see why this name wouldn’t trade for 20x forward eps or $160.

Catalyst

Execution

Multiple re-rate

Return of Capital