2. Industry Analysis
Food and staples retailing, 2nd largest segment of consumer staples industry
Pros: defensive, stable growth, dependable revenue, low beta
Cons: rising raw material costs, high valuations
During periods of weak growth, industry tends to outperform (demand for basic products remains stable)
Lawmakers considering legislation to prohibit Canadian pharmacies from selling prescription drugs to US mail-order customers
Consumer preference has shifted towards cost-effective choices
Baby boomers propelling growth in drugstore segment

3. Company Overview
CVS Health Corporation is a pharmacy innovation company
9,600 retail pharmacies, 1,100 walk-in medical clinics, PBM w/ over 75 million plan members, senior pharmacy care business serving over 1 million patients per year, & specialty pharmacy services
Three reportable segments: Pharmacy Services, Retail/LTC, Corporate
Major competitors: Walgreens, Walmart, Express Scripts (PBM)

4. Basic Figures Annual dividend rate: $1.70 Annual dividend yield: 1.62%
Beta: 0.96
Market capitalization: $114.8 billion
52-Week Range: $81.37-$113.65
Price as of today:
P/E: 21.9

5. Pharmacy Services Provides pharmacy benefit management (PBM) solutions
PBM – third-party admin of prescription drug programs
Essentially, lowers costs + improves health care outcome
Clients: employers, insurance companies, unions, gov’t employee groups, health plans, Managed Medicaid plans, plans offered on public and private exchanges, and individuals
Develop and maintain lists of drugs covered, negotiate discounts and rebates w/ drug manufacturers, and process and pay prescription drug claims
Includes mail order pharmacy, specialty pharmacy, and MinuteClinic

6. Retail/LTC
Retail
Sells prescription drugs and assortment of over-the-counter and personal care products, beauty and cosmetic products, and “front store” products (general merchandise)
LTC
In Aug. 2015, acquired Omnicare
Omnicare’s long-term care (LTC) offers ancillary services to chronic care facilities

7. Corporate
Provides management and admin services to support overall operations of CVS Health Corporation

8. Recent Developments New image Focus on health care services
In Feb. 2014, stopped selling tobacco products
Changed name from CVS/Caremark to CVS Health
Focus on health care services
MinuteClinic – plan sponsored co-pay reductions → reduces emergency room visits, helps to lower overall health care costs
Face-to-face patient counseling
Target acquisition
In Dec. 2015, acquired pharmacy and clinic businesses of Target
Acquired Target’s 1,672 pharmacies across 47 states, clinic locations will be rebranded as MinuteClinic, CVS Pharmacy will be included in all new Target stores that offer pharmacy services

9. Hypothesis
Target acquisition → higher volume → leverage in obtaining lower drug- acquisition costs
Revenue growth, EPS growth, increase in net income, good cash flow, and solid return on equity outweigh low profit margins and other weaknesses/risks

10. Positives Revenue growth Earnings per share growth
Since same Q one year prior, revenues rose by 11.0% (beating industry average of 7.7%)
Earnings per share growth
Since same Q one year prior, earnings per share rose by 17.5%
Increase in net income
Since same Q one year prior, net income increased by 13.4% (significantly exceeded that of the S&P 500 and the Food & Staples Retailing Industry)

11. Positives Cash flow from operations Return on equity
Since same Q one year prior, cash flow increased by 4.32% (beating industry average of %)
Return on equity
Since same Q one year prior, return on equity increased by 14.05% (lower than industry average of 17.97%, but higher than S&P 500 average of 12.28%

12. Risks Declining gross margins Reimbursement levels Compliance
Competitive pressures + increased client demand for lower prices
More pharmaceutical manufacturer discounts going directly to patients
Reimbursement levels
Increased utilization of generic pharmaceuticals (higher profit rate, decreased reimbursement payments) + consolidation within generic manufacturing industry → difficulty offsetting decreased reimbursement through negotiating lower costs
Compliance
Increase in gov’t regulation and audits
Client losses
Increased consolidation in PBM market
If client acquired by non-client, may be unable to retain all or a portion of the acquired business

13. Risks Acquisitions Debt Litigation Weak liquidity
May be unable to successfully integrate
Debt
May dampen incremental investments in business and limit flexibility to respond to industry changes and market conditions
Litigation
Retail and LTC highly litigious industries
Weak liquidity
Quick Ratio is 0.62, shows lack of ability to cover short-term cash needs
Gross profit margin: 19.16% for Q4 FY15, 19.22% for Q4 FY14

14. Litigation Currently involved in various legal proceedings
Securities class actions
Antitrust litigation
Qui tam and False Claims suits

15. Looking Forward
Will be focusing on converting current Target customers that don’t already use the store’s pharmacy services
Back-store sales better than front-store sales
Continued growth in clinic business; now owns 1,135 clinics in 33 states, last Q opened 36 new MinuteClinics and added another 79 as part of Target acquisition
However, CEO Larry Merlo stated that the company may not hit its goal of having 1,500 clinics by 2017, as the company will be focusing on the Target integration

16. Looking Forward
Thomson Financial EPS estimates: $5.82 for 2016, $6.56 for 2017
CVS adjusted EPS estimate: between $5.73 and $5.88 for 2016