Stock Valuation: CVS Health Corporation (CVS)
CVS Health Corporation is a company that was founded in America that provides pharmacy health care services through two segments: Pharmacy Services and Retail Pharmacy. Its company slogan is “Health is everything.” The Pharmacy Services segment focuses on pharmacy benefit management services which serves employers, unions, insurance companies, as well as many others. It provides services such as prescription management services, clinical services, and plan design and administration. It is the second largest prescription management and pharmaceutical services business in the United States.
The other segment of CVS Health Corporation is its Retail Pharmacy, which includes its over 7,500 retail drugstores across the United States. It is the second largest pharmacy chain in the United States. The Retail Pharmacy segment sells prescription drugs, over-the-counter drugs, beauty products, convenience foods, greeting cards, as well as many other products and services. Along with its retail drugstores, this segment also has 860 health care clinics which are all located relatively closely to its retail drug stores.
As of May 30, 2015, the consensus forecast amongst 25 polled investment analysts covering CVS Health Corp advises that the company will outperform the market. This has been the consensus forecast since the sentiment of investment analysts improved on Apr 08, 2004. The previous consensus forecast advised investors to hold their position in CVS Health Corp. A 12 month price targets for CVS Health Corp was forecasted, with a median target of $115, a high estimate of $125 and a low estimate of $108. The median estimate represents a 15.06% increase from the last price of $99.95. Both dividends per share and earnings per share excluding extraordinary items growth increased 22.22% and 5.90%. The positive trend in dividend payments is noteworthy since very few companies in the Retail Drugs industry pay a dividend. With everything going in favor of CVS, they plans to grow and expand by buying Omnicare for $12.7 billion.
2. Beta and WACC
This company's capital structure relies on a level of debt that is comparable with the Food and Staples Retailing industry's norm, at 25.65%. Additionally, even though there are not enough liquid assets to satisfy current obligations, Operating Profits are more than adequate to service the debt. Accounts Receivable are typical for the industry, with 24.58 days worth of sales outstanding. Last, inventories seem to be well managed as the Inventory Processing Period is typical for the industry, at 36.04 days.
Beta:
Rationale for any adjustments How does your beta compare to Yahoo’s, Value Line’s? What might cause any difference?
WACC assumptions (basis): Capital structure
Interest rate on debt
Tax rate
Beta: 1.09
WACC = 13.50%
KE:14.87%
Beta equation, kE :
E(RCVS) = RF + βCVS [E(RM) – RF]
14.87%= 2.92% + 1.09 [13.84% – 2.92%]
= 14.87%
The abo.
Stock Valuation CVS Health Corporation (CVS)CVS Health Corpor.docx
1. Stock Valuation: CVS Health Corporation (CVS)
CVS Health Corporation is a company that was founded in
America that provides pharmacy health care services through
two segments: Pharmacy Services and Retail Pharmacy. Its
company slogan is “Health is everything.” The Pharmacy
Services segment focuses on pharmacy benefit management
services which serves employers, unions, insurance companies,
as well as many others. It provides services such as prescription
management services, clinical services, and plan design and
administration. It is the second largest prescription management
and pharmaceutical services business in the United States.
The other segment of CVS Health Corporation is its Retail
Pharmacy, which includes its over 7,500 retail drugstores across
the United States. It is the second largest pharmacy chain in the
United States. The Retail Pharmacy segment sells prescription
drugs, over-the-counter drugs, beauty products, convenience
foods, greeting cards, as well as many other products and
services. Along with its retail drugstores, this segment also has
860 health care clinics which are all located relatively closely
to its retail drug stores.
As of May 30, 2015, the consensus forecast amongst 25 polled
investment analysts covering CVS Health Corp advises that the
company will outperform the market. This has been the
consensus forecast since the sentiment of investment analysts
improved on Apr 08, 2004. The previous consensus forecast
advised investors to hold their position in CVS Health Corp. A
12 month price targets for CVS Health Corp was forecasted,
with a median target of $115, a high estimate of $125 and a low
estimate of $108. The median estimate represents a 15.06%
increase from the last price of $99.95. Both dividends per share
and earnings per share excluding extraordinary items growth
increased 22.22% and 5.90%. The positive trend in dividend
payments is noteworthy since very few companies in the Retail
2. Drugs industry pay a dividend. With everything going in favor
of CVS, they plans to grow and expand by buying Omnicare for
$12.7 billion.
2. Beta and WACC
This company's capital structure relies on a level of debt that is
comparable with the Food and Staples Retailing industry's
norm, at 25.65%. Additionally, even though there are not
enough liquid assets to satisfy current obligations, Operating
Profits are more than adequate to service the debt. Accounts
Receivable are typical for the industry, with 24.58 days worth
of sales outstanding. Last, inventories seem to be well managed
as the Inventory Processing Period is typical for the industry, at
36.04 days.
Beta:
Rationale for any adjustments How does your beta compare to
Yahoo’s, Value Line’s? What might cause any difference?
WACC assumptions (basis): Capital structure
Interest rate on debt
Tax rate
3. Beta: 1.09
WACC = 13.50%
KE:14.87%
Beta equation, kE :
E(RCVS) = RF + βCVS [E(RM) – RF]
14.87%= 2.92% + 1.09 [13.84% – 2.92%]
= 14.87%
The above table shows the calculation of the Weighted Average
Cost of Capital (OTC:WACC). Cost of equity has been
calculated using a market return of 10.3% (5-year average
return of S&P 500) and a risk free rate of 2.91% (10-year
Treasury bond yield). The cost of equity is calculated to be
9.49%. Similarly, the after tax cost of debt is calculated to be
3.16%. Using these costs, a WACC of 8.54% has been derived
from the WACC formula.
3. Dividends Discount Models:
Constant Growth:
Dates
Dividends
Growth Rate
Required Rate of Return
Value of Growth:
P= Div*(1+g)/(r-g)
4/22/2015
$0.35
5. Years
Future Growth Rate Estimate (FGR)
Estimated Future Dividends
Future Growth Rate Estimate
2014
8.29%
$0.275 (given)
Div*(1+2014 FGR)=2015 Div
2015
9.62%
$0.2977975
0.275*(1+8.29%)= 2015 Div
2016
10.96%
$0.32644562
2015 Div*(1+ 2015 FGR)=2016 Div
2017
12.29%
$0.362224059
2016 Div*(1+ 2016 FGR)=2017 Div
2018
13.62%
$0.406741396
2017 Div*(1+ 2017 FGR)=2018 Div
2019
15.53%
$0.462139574
2018 Div*(1+ 2018 FGR)=2019 Div
There are a few important factors that determine the stock
value; the list includes valuation, growth expectations,
volatility, required rate of return, dividends. Valuation is the is
the method of calculating theoretical values of companies and
their stocks by their assets and liabilities. This plays a big role
in the long term, the main use of this method is to predict future
6. market prices. CVS’s valuation is 17%, a little less than S&P
500 which is 18.2%. Growth expectations is based on how the
economy is doing and on the volatility. Volatility is measure of
how much the stock price is likely to change over time, and the
more risky it is, the more it will change. If the economy is
change in a positive way then the stock price goes up and vice
versa if the economy change is bad. The economy has been good
and stable resulting in CVS expanding internationally.
Required rate of return is a profit on an investment over a
period of time, investors use this to see where to invest their
money in. They use the dividend discount model to pick stocks;
the RRR affects the maximum price they are willing to pay for a
stock. When a company goes through the process of issuing a
dividend, the company’s stock price can potentially be
impacted. in two different ways. The first way is if the company
declares a dividend payment that’s higher or lower than
expected, market sentiment may shift causing the stock price to
rise or drop accordingly. The second way is if an expected
change in price occurs on the ex-dividend date when the
company decreases its market cap by the declared shareholder
payout. In CVS’s case, they are increasing their dividends,
which means that the company is doing well overall.
The Multi-stage growth works better for this company because
it take the dividend discount models a step closer to reality by
assuming that the company will experience differing growth
phases. Stock analysts build complex forecast models with
many phases of differing growth to better reflect real prospects.
4. Free Cash Flow to the Firm (Dec 31, 2014)
7. Value of company
146,747
· Value of debt
12955
· Value of preferred stock
0
Value of stock
133792
Divide by # shares
1060
Price per share
126
Using the free cash flow to firm method, the stock’s value is
determined from the value of company. This in turn is
calculated by discounting the future cash flows to firms. Hence
it is important to make sense of the growth rates used in
estimating the future free cash flows in the next five years.
These growth rates are taken from the dividend discount model
with 10.96%, 12.29% and 13.62% for 2016, 2017 and 2018
respectively. From 2019 onwards, the growth is estimated to be
constantly at 5%. This is considered a rather drastic drop from
13.62%. This can be explained by a number of reasons.
5. Multiples
In order to determine which multiples to use to value the
company, we researched multiples for the industry the company
is under as well as the company’s competitors. We looked for
common multiples that were used by its competitors that we
could compare our values with. From there we determined
which multiples were the most relevant and useful in order to
create an accurate valuation of the company. The multiples we
decided to use are easily comparable to other companies with
8. the industry such as Walgreens and McKesson.
One multiple we used is the price to earnings ratio which shows
the growth potential for a company. The industry average is
23.40 so CVS is a little above average with a price to earning
ratio of 24.64 which means its potential to growth in the future
is a little more than other companies in its industry. Another
multiple we used is the price to book ratio which shows if a
stock is priced low compared to its potential for high growth.
CVS has a price to book ratio of 3.01 compared to the industry
average of 4.15 which shows that CVS is only worth three times
more than its book value which is less than average. We also
used the price to sales ratio which shows the value placed on
each dollar of a company’s sales or revenues. The price to cash
flows ratio can show whether a stock is undervalued or
overvalued. We took these multiples and compared the value for
CVS with the industry average as well as with some of its
competitors.
Multiple
Equation
CVS Value
P/E Ratio
market price per share / annual earnings per share
24.64
Price-to-Book Ratio
stock price per share / shareholders’ equity per share
3.01
Price-to-Sales Ratio
share price / sales per share
0.82
Price-to-Cash Flows Ratio
share price / cash flow per share
14.5