ModernGraham Valuation: CVS Caremark (CVS)

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Company Profile (obtained from Google Finance): CVS Caremark Corporation (CVS Caremark), together with its subsidiaries, is a pharmacy health care provider in the United States. CVS Caremark provides pharmacy services through its pharmacy benefit management (PBM), mail order and specialty pharmacy division, CVS Caremark Pharmacy Services; approximately 7,300 CVS/pharmacy retail stores; retail-based health clinic subsidiary, MinuteClinic, and its online retail pharmacy, CVS.com. The Company operates in three business segments: Pharmacy Services, Retail Pharmacy and Corporate. Its corporate segment provides management and administrative services to support the overall operations of the Company. In April 2012, Health Net, Inc.’s subsidiary, Health Net Life Insurance Company, sold its Medicare stand-alone Prescription Drug Plan (Medicare PDP) business to a subsidiary of CVS Caremark. In February 2013, it bought Drogaria Onofre.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $67
MG Opinion Fairly Valued
Value Based on 3% Growth $45
Value Based on 0% Growth $26
Market Implied Growth Rate 6.54%
Net Current Asset Value (NCAV) -$6.51
PEmg 21.59
Current Ratio 1.42
PB Ratio 2.09

Balance Sheet – 9/30/2013 

Current Assets $21,432,000,000
Current Liabilities $15,098,000,000
Total Debt $8,819,000,000
Total Assets $67,805,000,000
Intangible Assets $36,137,000,000
Total Liabilities $29,271,000,000
Outstanding Shares 1,204,000,000

Earnings Per Share – Diluted

2013 (estimate) $3.79
2012 $3.03
2011 $2.59
2010 $2.50
2009 $2.56
2008 $2.27
2007 $1.92
2006 $1.60
2005 $1.46
2004 $1.11
2003 $1.04
2002 $0.88

Earnings Per Share – Modern Graham (Calculating EPSmg)

2013 (estimate) $3.09
2012 $2.69
2011 $2.47
2010 $2.33
2009 $2.15
2008 $1.86

Conclusion:

CVS Caremark is a very good company, but it just barely does not qualify as suitable for either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the company’s current ratio is too low and the company is trading at a PEmg ratio above 20.  For the Enterprising Investor, the company has slightly too much debt, causing the debt to net current assets ratio to be too high as well as the current ratio.  From a valuation standpoint, the company fares well in the ModernGraham valuation model after having grown EPSmg (normalized earnings) from $1.86 in 2008 to an estimated $3.09 for 2013.  The market is implying a growth rate of 6.54%, which is in line with what the company has achieved in recent times.  Therefore, the company may be fairly valued at this time.  Any investor considering CVS Caremark should do considerable further research before deciding the company is right for an individual portfolio.

What do you think?  Is CVS Caremark fairly valued?  Is the company not suitable for Defensive Investors or Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in CVS Caremark at the time of publication and had no intention of entering into a position in the next 72 hours.

Photo Credit:  Andrew Magill

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