2. Introducing the Industry
• Pharmacy Services industry
falls within the Healthcare and
Consumer Non-Cyclicals
• Healthcare has a relatively high
valuation and returns as
compared to the S&P
3. Introducing the Industry
• S&P has company and industry studies
• S&P calls this industry Drug Retail and has
it listed under Consumer Staples sector
• Morningstar has it under Healthcare sector
• Value Line has it under Healthcare sector
• CVS and WGA are conglomerates
(pharmacy, clinics, drug plans)
4. Introducing the Industry
• S&P company reports,
provides a one page
description of the
industry outlook
• Value Line also has
industry reports
5. Introducing the Industry
• To get a good picture of this industry, just google it.
• “Health Care Plans Industry” or “Pharmaceutical Services”
• You will get a plethora of opinions and analysis of this industry
• After reading several, you will get a good general picture of the industry
• S&P has industry studies of about 60+pgs but you have to pay for them
6. Industry Findings
After researching, jot down a few “take-aways”…
• Aging baby boomers and increase in insured boost prescription drugs
• Very competitive
• Low margins
• Many large mature companies that pay dividends
• Merger and acquisitions taking place to grow operations and earnings
7. Identifying Competitors
• Used Value Line and Standard and Poors because
Morningstar and Finviz had CVS in with Health
Care Plan industry.
• Better Investing also has studies that can be used to
find promising competitors: Ticker Talk, First Cut,
StockUp, Magazine
8. Narrowing Competitor List
I would typically use Finviz and screen these variables…
• Sector – XXXX
• Industry – YYYY
• Short Float - < 15%
• PEG < 2
• ROE > 10%
• You can also use Sales and EPS growth rates and PTP Margin to narrow the list
9. Narrowing Competitor List
But CVS is not a strict pharma, so I added additional
companies from Value Line in the screener…
• I manually added these: GNC, WBA, CVS, BIOS, ESRX, OCR, PETS, PMC, RAD
• Sector – I did not use this feature
• Industry – I did not use this feature
• Short Float - < 15%
• PEG < 2
• ROE > 10%
10. Narrowing Competitors to Study
http://finviz.com/screener.ash
Results
• CVS
• GNC
• WBA
• ESRX – had a PEG > 2
14. Would you
throw any out?
WBA
GNC
Zero Percent Return Line
CVS
ENSX
Quarterly Numbers
15. Sales/Earnings Forecast Summary – Value Line, Morningstar, Zachs, BI
Year WBA GNC ESRX CVS
Sales
($/share) EPS
Sales
($/share) EPS Sales ($/share) EPS
Sales
($/share) EPS
2011 81.17 2.64 20.31 1.24 70.52 5.21 82.51 2.8
2012 75.88 2.53 24.49 2.29 114.73 1.79 100.03 3.43
2013 76.29 2.61 27.99 2.72 134.56 2.31 107.42 4
2014 80.41 2.9 29.58 2.81 138.94 2.64 122.25 4.51
2015 101.4 3.65 31.65 3.05 150.35 3.25 133.75 5.15
est. 2018 to 2020 152.85 6.1 41.25 4.75 159.35 5.65 176.9 7.2
CAGR (%) - 2011 to 2019 10.1 13.0 7.9 12.5 5.9 8.9 9.0 11.3
CAGR (%) - 2013 to 2019 12.2 14.8 6.8 10.7 2.4 15.6 7.9 9.6
VL % Growth (2018-20) 12.0 15.0 7.5 10.5 6.0 16.0 8.5 11.0
BI Preferred Procedure 11.8 8.8 14.7 7.0
Morningstar 5 yr est. 24.9 11.5 36.6 17.1
Zachs 5 yr est. 11.9 11.3 12.6 13.3
Yahoo 5 yr est. 14.7 12.0 13.0
Yahoo 1 yr est. 17.8 4.1 2.9
Morningstar 2 yr est. 3.1 9.5 7.3 5.5
What I used 9 11.4 9.5 8.3 13 14.7 7 7.3
CAGR = Compound Annual Growth Rate
16. SSG Section 2: Evaluating Management
Management Quality Measures
% Pretax Profit on Sales = Net Income Before Taxes/Net Sales
% Return on Equity = Net Income After Taxes / Shareholder Equity
% Debt to Capital
17. Return on Equity, Pretax Profit on Sales, and Debt to Capital
CVS
GNC
ENSX
WBA
18. SSG Section 2: Evaluating Management
• GNC has the best pretax profit and is about twice as high as the others
• GNC and ESRX return on equity is about twice as high as the others
• GNC and ESRX have twice the debt as the others as well (>40%), this is probably
why both have higher ROE
• BI generally recommends staying away when % Debt to Capital is > 30%
• Interest coverage ratio: ESRX = 6.3, GNC = 9.7; Red Flag (recommend > 7 or 8)
• Drop ESRX from further consideration until their debt is more manageable
19. SSG Section 3:
Price and Earning History
• We do not want to buy an overpriced stock
• PE fluctuates based on investor sentiment and market conditions
• Use price and earnings history to forecast high and low stock price
• BI includes a 5-yr table with this information; may want to go back further
• Our goal is to strike the outliers so they are not used in our price forecasts
20. SSG Section 3:
Price and Earning History
I don’t plan to strike the high PE. Competitor, WBA, had very high PEs about 10 years ago. They are going up.
CVS
21. SSG Section 3:
Price and Earning History
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
WAB 43.3 38.1 46.4 36.8 27.7 26.3 27.9 26 22.2 17.1 13.9 15.9 14.8 13.2 16.3 21.8
GNC 18.2 15.6 17.6 14.9
CVS 19.6 19.3 19.1 15 12 12.1 12.9 13.2 14.7 17.4
I don’t plan to strike the CVS high PE. Competitor, WBA, had very high PEs about 10 years ago.
23. SSG Section 4:
Risk and Reward
• Now we use our P/E history to forecast our high and low prices
• Our forecasts are for a full market cycle which may be longer than 5 years
• Remember, the market may be topping right now, especially the health care sector
• You may be buying right before a correction and have to wait for the next top
24. Forecasting High Price
• Current P/E is high compared to the 5-year avg. high. Use the 5yr avg. high.
• High EPS comes from Section 1 of the SSG, 5 years out (it grows for growth companies).
25. Forecasting Low Price
• These three companies are mature companies
• They are not fast growers given their sales (<10% per year)
• They all pay a nice dividend as a way to reward shareholders
• Income investors like these types of companies, they add stability to their portfolio and
pay them to wait for the incremental increase of stock price
• As such, investors will buy them up when the dividend yield is high.
• As such, yield investors provide low or bottom price support.
26. • I selected the last option
(price dividend will
support). I depend on
income investors to
provide a solid bottom
price support.
27. Zoning
• I will use our high and low price forecasts for a buy and sell strategy
• BI uses a zoning method for providing buy and sell signals. CVS is a sell right
now but you can use the buy price as a pounce price (buy when its reached)
28. Upside Downside Ratio
• BI provides a way to estimate the reward and risk of owning a stock
• USDS ratio for CVS (below) is invalid because the forecast high is below the
current price; it’s a fully valued stock
• BI recommends waiting until it reaches a 3 to 1. If you do this, for every under
performer, you will have a over performer, the rest will meet your 15% annual
appreciation goal.
29. Price Target
• The price target for CVS is down. I do not expect the price to increase
• Some analysts contradict this because CVS recently bought Omnicare and Target
pharmacies to increase value beyond the data that is available to me.
• I do not have the expertise to put a valuation on this…
• S&P value it at $126/share in 12 months rather than my $103 in the next 5 years.
30. SSG Section 5:
5 Year Potential
Return
Average annual return is
essentially less than the
dividend.
There is no P/E expansion
expected unless they do
something (look at SSG graph
of the price and earnings)
32. Stock Comparison Guide
• Used to compare companies
• Companies should be in the same
industry and similar
• CVS and WBA are very similar
pharmaceutical companies
• GNC is more of a vitamin retailer
33. Industry Study Take-Aways
• Industry is overpriced right now for expected earnings (just look at the SSG sales
and earnings graph); however, M&A is expected to produce growth.
• Industry has a few big players; they are large, mature companies
• CVS and WBA were hard to put a valuation on since they are conglomerates and
have been using M&A to grow.
• Both also have clinics and provide drug plans
• Mergers and acquisitions are occurring to increase revenue and earnings
• Could use the studies low price for the pounce list
