More Related Content
Similar to Pharmacy Services Sector
Similar to Pharmacy Services Sector (20)
Recently uploaded
Recently uploaded (20)
Pharmacy Services Sector
- 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
- 11. Lets Start our Study
- 12. SSG Section 1: Visual Analysis (Sales/EPS/Price) Select companies with sales and EPS stats that are: Up Straight Parallel
- 13. Would you throw any out? CVS WBA GNC ESRX Annual Numbers
- 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.
- 22. Price and Earnings History GNC WBA
- 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)
- 31. CVS WBA
- 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