FIN 4310-001 Company Valuation
Market Profile
120.00
72.37-105.46
52 Week Price Range
100.00
4,600,250
Average Daily Volume
0.96
80.00
1.40(1.30%)
60.00
1.14B
40.00
Beta
Dividend Yield (Estimated)
Shares Outstanding
Market Capitalization
117.09B
Institutional Holdings
87%
20.00
Book Value per Share
33.3
Debt to Total Capital
34.13
CVS Stock Price
Current Price: $103.65
0.00
2.04M
Insider Holdings
12%
Return on Equity
Historical EPS
Highlights
Q1
Q2
Q3
Q4
Year
2012
$0.60
$0.76
$0.80
$0.90
$3.04
2013
$0.77
$0.92
$1.03
$1.06
$3.77
2014
$0.96
$1.06
$0.82
$1.16
$3.98
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Stock Info
Ticker
TICKER: CVS
04/08/2015
CVS
Current Price
103.65
Recommendation
HOLD
Price Target
98.43
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Growth in Medicare Lives: With 10,000 baby boomers turning 65 every
day, the Medicare-eligible population is increasing. CVS is well
positioned to serve this market through their retail pharmacies, PBM,
and SilverScript which is currently in second place for Medicare Part D
prescription drug plan. CVS has reported more than 24,000 pharmacists
across their enterprise.
Reduce Costs Not Care: With U.S. health care and prescription drug
spending on the rise, CVS offers comprehensive solutions that help
clients manage this trend wthout sacrificing patient care. With one large
health plan client, CVS’ entire enterprise is involved and collaborating
with its patient-centered medical home (PCMH) model. CVS provides
face-to face adherence counseling while also providing information
directly into the patient’s electronic health record at the PCMH.
New Ways to Save: CVS Health is pioneering new strategies to lower
costs for health plans and their members, which includes
CVS/minuteclinic utilization and innovative formulary strategies. CVS is
also participating in narrow restricted pharmacy networks. CVS reduced
co-pay at CVS/minuteclinic by 8% for patients who use their walk-in
medical clinics. Also, formulary management strategy is expected to
drive total incremental client savings of 3.5 billion from 2012-2015.
Removing Tobacco Products: CVS is the first national pharmacy chain
to remove tobacco products from shelves. It is reported that once you
quit smoking, it only takes 20 minutes for the body to begin healing. CVS
has proven that they are not solely focused on driving sales and
revenues, but in the overall health of its clients.
(Source 1)
CVS Company Valuation 2015
Business Description
CVS Health Corporation, jointly with its affiliates, delivers incorporated pharmacy health
care in the United States. Through 7,700 retail pharmacies, more than 900 walk-in
medical clinics, a prominent pharmacy benefits administrator with more than 65 million
plan members, and escalating specialty pharmacy services, CVS facilitates individuals,
businesses and communities to administer well-being while being effective and also
making it affordable. CVS has an incomparable suite of competences and the capability
and proficiency needed to push innovations that will shape the future of health. For the
time being, CVS is the only incorporated pharmacy health care with the capability to
influence customers and suppliers with advanced, channel-agnostic solutions. CVS
programs are intended to encourage well-being, and to help direct unsuitable application
and non-obedience to medication, each of which has the possibility to result in
unfavorable medical events that undesirably impact affiliate health and client pharmacy
and medical spend. In response, CVS proposes different utilization management,
medication management, quality assurance, adherence and counseling programs to
complement the client’s plan design and clinical strategies. (Source 2)
Primary and Secondary Markets/Products
CVS’ predominant clients are employers, insurance providing companies, mergers,
government employee groups health plans, Managed Medicaid plans and plans offered on
public and private exchanges other sponsors of health benefit plans and individuals
located throughout the United States. It offers pharmaceuticals to appropriate members in
benefit plans sustained by its clients and utilize its information systems, among other
things, to aid in performing safety checks, drug interaction screening and identify
opportunities for generic substitution. (Source 2)
Business Risks/Outstanding Litigation
In the year of 2011, according to the U.S. Justice Department, CVS pharmacies located in
Sanford, Florida, ordered excess amounts of painkillers, enough to supply a population
eight times its size. At the time, Sanfords population was a measly 53,000, however, the
order requested from CVS would be enough for a population of 400,000. According to
the Drug Enforcement Administration, it was recorded that in 2010, one CVS store
located in Sanford ordered a staggering 1.8 million Oxycodone pills, which averages
137,994 pills a month. When compared to its competitors, CVS’ average was more than
130,000 pills a month. According to the Drug Enforcement Administration, a pharmacist
working at a location in Sanford stated that, “approximately every third car that came
through the drive-thru lane had prescriptions for oxycodone or hydrocodone”. It was also
stated that customers requested drugs using street slang, which then was lead to believe
that the drugs were being misused, not solely for pain management purposes.
CVS recently experienced financial risk when they decided that they would no longer be
selling cigarettes. However, this was no easy decision since the sale of cigarettes
normally results in $2,000,000 in sales. Despite coming to the decision that cigarettes
would no longer be carried in CVS stores around the United States, the company’s main
focus is to promote health and to secure a positive impact on the well-being of their
customers. (Source 3)
CVS Company Valuation 2015
Business Model
CVS is a company most Americans are familiar with, primarily due to the fact that we are
reliant on their pharmaceutical products, and that they have a strong nationwide presence.
The company can be split up into three different segments:
Retail Pharmacy Segment:
CVS currently operates approximately 7,700 stores worldwide. This segment is made up
of three categories; Pharmacy, Front Store, and Minute Clinic. The Pharmacy fills
prescriptions and accounts for a significant amount of the company’s revenue stream.
The Front Store category sells general merchandise as well as over the counter
medications. Lastly, the Minute Clinic allows customers to receive basic healthcare at
their physical locations, administered by registered professionals. CVS strategically
places stores in convenient locations, close to where people live or work. For this reason
customers are drawn to CVS not only for their pharmaceutical products, but also for
groceries and other consumer goods.
Pharmacy Services Segment:
This segment consists of their PBM business, Mail Order Pharmacy, Medicare Services,
and Specialty Pharmacy services. The bulk of annual revenue is attributable to this
segment. The PBM services consist of designing drug plans for other large entities,
managing benefits, and offering discounts through scale. The Mail Order business
accounts for all of their customers who prefer to receive their prescriptions through the
mail. The Medicare services part accounts for customers who are subscribed to the Part D
program, CVS distributes the benefit of that plan for those eligible customers. Lastly the
Specialty Pharmacy administers expensive medications for serious illnesses, such as
cancer or multiple sclerosis.
Corporate Segment
This segment provides support for the other two segments; including departments like;
Executive Management, Finance, Legal, Compliance, Human Resources, etc. (Source 1)
SWOT Analysis
Strengths
Low Cost Provider of Drugs
Limited Competition
Large Network of Locations
Loyalty Rewards Program
Large Brand Awareness
Weaknesses
Difficult to integrate acquisitions
High COGS and operational expenses
Opportunities
Change in healthcare laws
Aging population
Introduce more generic drugs
Global Expansion
Threats
Walmart focusing on pharmaceutical drugs
Changing Healthcare Environment
Generic drugs lowering margins
CVS Company Valuation 2015
Revenue Drivers:
The bulk of the company’s revenue comes from their Retail Pharmacy, and PBM
business. It is also important to note that their specialty drug products, for serious
illnesses, have exceptionally good margins, therefore CVS should focus on increasing
their specialty drug business.
Expense Drivers:
CVS does have a high Cost of Goods Sold, relative to Sales. The majority of their
expenses stem from COGS, discounts payable, accounts payable, and discounts and
claims payable.
Gross Margin %
Year
CVS
Walgreens United Health Group Rite Aid. Corp. Express Scripts
2010
21.10%
28.20%
26.90%
26.60%
6.80%
2011
19.20%
28.40%
27.00%
26.50%
7.00%
2012
18.30%
28.40%
27.50%
26.00%
7.90%
2013
18.80%
29.20%
27.10%
28.80%
8.00%
2014
18.20%
28.20%
28.50%
28.70%
8.30%
Average
19.12%
28.48%
27.40%
27.32%
7.60%
(Source 2)
Gross Margin Trend:
CVS does not have the most impressive Gross Margin’s when compared to its fellow
Pharmaceutical competitors. Another worrying issue for management to consider is the
fact that over the past 5 years the gross margin has been trending down, indicating as the
company’s revenues increase, margins decrease.
Recent Financial Performance
Recent Quarter:
Overall 2014 was a great year for CVS, but Q4 was an especially strong close to the year.
We would like to bring attention to the following key metrics, which give investors
promising feedback on the financial position of the company.
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Adjusted earnings per a share (EPS): up 8.4% from last year Q4
Retail Operating Profit: up 6.5% from last year Q4
Returned more than $1.5 billion to shareholders in Q4
Repurchased more than 14.1 million shares for $1.2 billion in Q4
Consolidated Revenues were up 12.9% in Q4 vs. last year
Retail revenues up 2.9% vs last year Q4
Added 35 new clinics in Q4
These metrics reflect strong growth across all of CVS’s operating segments, particularly
in retail. Strong performance was driven by strong pharmacy same store growth.
(Source 4)
CVS Company Valuation 2015
Past Year (2014):
Overall 2014 was a very successful year for CVS.
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Adjusted earnings per a share (EPS): up 13.5% from last year
Retail Operating Profit: up 7.9% from last year
Free Cash Flow: up 48.1% from 2013
CVS has been able to achieve significant growth in 2014, despite a controversial decision
to drop cigarettes from its stores, which had less of a negative impact than expected.
Past 5 Years:
The past 5 years have seen CVS experience significant growth, steadily increasing its
stores by 618, which equates to a 7.9% growth. With the amount of stores
increasing, revenues have also enjoyed a healthy growth each year. In 2010
revenues were at $95 billion, but each year they have grown, and last year’s
revenues were up to $139 billion. Another area that might excite investors is the
company’s dividend over the past couple years, growing from $.35 in 2010, to $1.10
in 2014. It is important to note that in the past 5 years the greater economy has seen
significant growth as a whole, especially the stock market. (Source 4)
Past 5 Years Income Statement:
The past five years have been very beneficial for CVS. They have seen their revenues
grow swiftly, but more importantly there profitability steadily grow too. Earnings
per a share have grown substantially from $2.51 in 2010, to $3.98 in 2015.
Past 5 Years Balance Sheet:
As the company has grown steadily over the past few years, most assets categories
have imitated that steady increase. However there are some notable increases. In
2013, Total Cash and Short Term investments shot up from $1.3 billion to $4.2
billion, however they experienced a rapid decline in 2014 back down to $2.5 billion.
Asset growth has been slow and steady, which is common of such a mature large
company. Notably, 2014 was the first year that the company took on long-term
investments in this period.
On the Liability side of the balance sheet there was similar steady growth in
liabilities. Total Current Liabilities saw a major increase, driven by an increased
reliance of short-term borrowings. Long-term debt is actually down from 2013.
Past 5 Years Cash Flows:
Cash from Operations has seen a steady increase over the last few years,
experiencing a notable jump in 2014 from $5.7 billion to $8.1 billion. Cash from
investing has also seen similar trends, rising from -$1.1 billion to -$4.0 billion.
Dividends paid are at a period high, and they are paying back a large amount of debt.
The net change in cash flow has been fairly inconsistent, with no recognizable
trends. (Source 4)
CVS Company Valuation 2015
Peer Group Analysis
Our group narrowed down CVS’s long list of competitors to the following.
Peer Group
CVS
Walgreens United Health Group Rite Aid. Corp. Express Scripts
Market Cap
$ 117,568.20
$95,133.02
$111,916.11
$8,587.42
$61,302.41
Total Revenue $ 139,367.00 $ 77,617.00
$130,474.00
$26,277.91
$100,887.10
Walgreens:
A competitor with a very similar business model provides a good benchmark due to
their similarity.
United Health Group:
This is a competitor that possesses a very similar size profile, which is emphasized
by close market capitalization and revenue. While not a direct competitor in the
retail pharmacy arena, they are a fierce competitor in the PBM segment.
Rite Aid Corporation:
While Rite Aid doesn’t match CVS’s size, they share a similar business model. Rite
Aid focuses on the Retail Pharmacy segment, as well as the general merchandise
products. (Groceries, Consumables, Beauty Products, etc.)
Express Scripts:
This competitor provides a very good comparable due to the similarity in size, and
the similar business model of the PBM.
(Source 2)
Product Differentiation and Market share
CVS Health is subdivided into 3 segments as the largest integrated pharmacy
company in the United States. This includes CVS/Pharmacy the second largest retail
pharmacy in the country with more than 7,700 stores. CVS/Caremark its leading
pharmacy benefit manager and mail service pharmacy serving more than 60 million
plan members. CVS/Minute Clinic the retail health clinic system division of CVS
Health, the largest in the nation with more than 900 clinics locations. CVS/specialty,
the specialty pharmacy division of CVS Health, which provides specialty pharmacy
services for patients who require treatment for rare or complex conditions.
In 2012, CVS Health filled 718 million prescriptions, which accounted for 20% of the
U.S. retail pharmacy market positioning the company as the leader in the country.
CVS products and services include: branded prescription drugs, specialty
prescription drugs, generic prescription drugs over-the-counter nonprescription
medication, cosmetics and toiletries, Food and beverages, other merchandise and
photo processing services, personal health goods. (Source 5)
CVS Company Valuation 2015
Porter’s Five Forces
The Drugstore Industry is a very large industry consisting of large, well-known
chains and small pharmacies that provide retail drug prescriptions, over-thecounter medications, health and beauty products, and often many other general
merchandise (Groceries, Beauty Products) product categories. The industry annual
growth rate is 2.2% with $257 billion in revenue. While local and regional
drugstores have their share of the market, the drugstore industry as a whole is
defined in large part by its heavy concentration. According to "Drug Channels" in
2013 the pharmacy industry consisted of five major chains which controlled 63 % of
the industry revenues. These five major chains included CVS Health, Walgreens
Boots Alliance, Rite Aid Corporation, Express Scripts and Walmart.
The demand for pharmaceuticals is constantly increasing as they become more
affordable to the average American due to health care. The expansion of coverage,
from laws such as the Affordable Healthcare Act, will have a lasting positive impact
on the demand for drugs prescription and consequently on CVS Health future
revenues. Revenues of U.S. drugstores are expected to reach $350 billion by the end
of 2015, growing at 5.3% annually. However, cost cutting measures implemented
by the government will likely shrink profit margins. Despite potentially small profit
margins, competition will remain strong among industry players.
The Pharmacies and Drug Stores industry has moderate barriers to entry, although
barriers to entry are increasing. Due to industry consolidation, which allows larger
players to develop large networks and favorable supply-side contracts with
pharmaceutical manufacturers, the industry is expected to have more barriers to
entry over the next five years. Further offsetting potential industry entrants, the
industry is subject to federal and state laws that make retailing certain products
subject to stringent regulations. Nevertheless the sector face increasing competition
from general merchandise, food retailers and supermarkets chains such as Walmart
which has infiltrated the list of the top five drugstore dispensers and gained market
share in the pharmacy business. Many regional and national supermarket chains
have significant pharmaceutical departments.
Since drugs store companies all elected to buy brand-name drugs via a drug
wholesaler rather than directly from a manufacturer they need to contract with
wholesalers. So there is some amount of supplier power. Three drugs wholesalers
companies control about 85% to 90% of all revenues from drug distribution in the
United States: AmerisourceBergen Corp. (NYSE: ABC), Cardinal Health Inc. (NYSE:
CAH) and McKesson Corp. (NYSE: MCK). Cardinal services the CVS retail stores and
distribution centers, while McKesson supplies the Caremark mail facilities and some
small retail businesses.
(Sources 6,7,8)
CVS Company Valuation 2015
Ratio Analysis
Our group decided to use a ratio analysis to better compare the peer group of CVS.
We focused on 4 major areas of comparison; Profitability, Long Term Investment
Activity, Short Term Investment Activity, and Liquidity. Our purpose, after
comparing each firm’s relative ratios, is to better understand CVSs’ position in the
industry.
Profitability Ratios:
Year
CVS
2010
2011
2012
2013
2014
Average
Return on Assets (ROA)
Walgreens United Health Group Rite Aid. Corp. Express Scripts
6.20%
8.80%
8.20%
1.70%
12.20%
6.20%
9.50%
8.10%
1.90%
11.10%
6.90%
7.20%
7.80%
2.20%
6.00%
7.20%
6.70%
7.40%
6.10%
4.80%
7.50%
6.80%
7.60%
6.80%
5.40%
6.80%
7.80%
7.82%
3.74%
7.90%
Return on Capital (ROC)
Year
CVS
Walgreens United Health Group Rite Aid. Corp. Express Scripts
2010
8.10%
13.50%
14.00%
2.90%
20.30%
2011
8.30%
15.10%
13.80%
3.40%
17.40%
2012
9.40%
10.70%
12.90%
4.20%
8.90%
2013
10.10%
9.60%
12.00%
11.90%
7.10%
2014
10.70%
9.90%
12.60%
13.20%
8.40%
Average
9.32%
11.76%
13.06%
7.12%
12.42%
Year
CVS
2010
2011
2012
2013
2014
Average
Year
2010
2011
2012
2013
2014
Average
CVS
Return on Equity (ROE)
Walgreens United Health Group Rite Aid. Corp. Express Scripts
9.30%
14.50%
18.70% NM
33.70%
9.20%
18.60%
19.00% NM
42.00%
10.20%
12.90%
17.90% NM
10.50%
12.20%
13.00%
17.00% NM
8.50%
12.20%
10.20%
16.70% NM
9.70%
10.62%
13.84%
17.86% NM
20.88%
Gross Margin %
Walgreens United Health Group Rite Aid. Corp. Express Scripts
21.10%
28.20%
26.90%
26.60%
6.80%
19.20%
28.40%
27.00%
26.50%
7.00%
18.30%
28.40%
27.50%
26.00%
7.90%
18.80%
29.20%
27.10%
28.80%
8.00%
18.20%
28.20%
28.50%
28.70%
8.30%
19.12%
28.48%
27.40%
27.32%
7.60%
CVS Company Valuation 2015
Profitability Ratios
As evidenced above, CVS has had a difficult time increasing its profitability. When
focusing on Gross Margin, it becomes clear that they are trending down in this area.
Their 5 year average for GM is 19.12%, which ranks them 4 th amongst the selected
group of competitors.
It is a slightly better picture for the 3 other profitability ratios, all showing signs of
modest increases over the last 5 years. However, when it comes to relative
positioning, CVS is consistently ranking 4th amongst competitors. To our group, this
is a sign of caution, because they have been increasing revenues but at a decreasing
rate of profitability.
Long Term Investment Activity
Long Term Investment Activity Analysis
Year
2010
2011
2012
2013
2014
Average
11.79
12.76
14.4
14.7
15.97
13.92
Net Fixed Asset Turnover
Walgreens United Health Group Rite Aid. Corp. Express Scripts
6.13
95.44
10.52
153.31
6.36
87.85
11.64
143.12
6.08
55.97
13.25
151.96
5.97
45.76
13.37
108.01
6.26
45.92
13.25
103.05
6.16
66.19
12.41
131.89
CVS
2010
2011
2012
2013
2014
Average
Year
1.55
1.69
1.88
1.84
1.91
1.77
Total Asset Turnover
Walgreens United Health Group Rite Aid. Corp. Express Scripts
2.62
1.54
3.13
4.00
2.69
1.56
3.23
3.53
2.35
1.49
3.5
2.54
2.09
1.51
3.52
1.86
2.10
1.55
3.64
1.88
2.37
1.53
3.40
2.76
CVS
Long Term Investment Activity Ratios
Overall CVS does have respectable turnover ratios; however their rank amongst
their competitors is not stellar. If you single out Walgreens vs. CVS, CVS is at a slight
disadvantage in the Total Asset Turnover, but inches back with a higher Net Fixed
Asset Turnover. Based on our selected peer group, CVS does need to improve.
CVS Company Valuation 2015
Short Term Investment Activity
Short Term Operating Activity Analysis
Year
2010
2011
2012
2013
2014
Average
Year
2010
2011
2012
2013
2014
Average
7.18
8.34
9.55
9.33
9.92
8.86
Inventory Turnover
Walgreens United Health Group Rite Aid. Corp. Express Scripts
6.83 N/A
5.59
120.57
6.7 N/A
5.79
113.42
6.8 N/A
6.14
85.22
7.36 N/A
5.74
54.34
8.48 N/A
5.92
46.43
7.23
5.84
84.00
52.36
44.61
39.95
42.2
41.68
44.16
Cash Conversion Cycle (Days)
Walgreens United Health Group Rite Aid. Corp. Express Scripts
33.68 N/A
52.01
-9.68
34.21 N/A
52.38
-12.7
32.26 N/A
48.22
-10.9
29.4 N/A
49.01
-14.77
26.79 N/A
47.87
-15.95
31.27
49.90
-12.80
CVS
CVS
Short Term Investment Activity Ratios
CVS has a Cash Conversion Cycle of 44.16, even though it is not the highest amongst
the peer group, it is a negative sign. The fact that it is such a high number, and that it
is positive, indicates that CVS may not be using their working capital as efficiently as
possible and that it may have a problem turning cash spent on inventory into cash
received on products sold.
CVS has a healthy Inventory Turnover, ranking 2nd behind Express Scripts, this
shows that they are able to turnover inventory in an efficient manner.
Short Term Investment Activity
-see following page.
CVS Company Valuation 2015
Liquidity Analysis
Year
CVS
2010
2011
2012
2013
2014
Average
Year
1.6
1.56
1.42
1.64
1.37
1.52
CVS
2010
2011
2012
2013
2014
Average
Year
2010
2011
2012
2013
2014
Average
0.57
0.62
0.56
0.84
0.64
0.65
CVS
0.43
0.49
0.47
0.37
0.43
0.44
Walgreens
1.6
1.52
1.23
1.34
1.38
1.41
Current Ratio
United Health Group Rite Aid. Corp. Express Scripts
0.67
2.07
0.75
0.74
1.82
1.48
0.67
1.75
0.82
0.63
1.71
0.64
0.67
1.71
0.62
0.68
1.81
0.86
Walgreens
0.58
0.5
0.4
0.53
0.66
0.53
Quick Ratio
United Health Group Rite Aid. Corp. Express Scripts
0.62
0.49
0.57
0.69
0.44
1.38
0.62
0.46
0.63
0.58
0.41
0.45
0.62
0.44
0.46
0.63
0.45
0.70
Walgreens
0.5
0.45
0.51
0.48
0.44
0.48
Cash Ratio
United Health Group Rite Aid. Corp. Express Scripts
0.26 NM
0.54
0.29
0.16
0.4
0.26
0.1
0.37
0.25
0.32
0.36
0.26
0.28
0.27
0.26
0.22
0.39
Liquidity Ratios
CVS has a very strong Current Ratio, especially with respect to the peer group; this
highlights the fact that the company shouldn’t have any problems paying off its
short term obligations. There is not too much difference between the competitors
when it comes to their Quick Ratios; they are all within a small range of each other.
It is promising that CVS does rank 2nd in this category. CVS also holds the same
ranking when looking at the Cash Ratio. Overall, we consider CVS to be the
healthiest when it comes to liquidity; this is based off their strong showing in all
three of the above ratios.
CVS Company Valuation 2015
Analysis of Future Performance
Our group has included a 5 year forecast, 2014-2019, of the project Income
Statement, Balance Sheet, and Statement of Cash Flows. The financial statements can
be found on the next page, preceded by a list of our assumptions for the forecast.
Forecast Assumptions
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CVS was at full operating capacity for 2014.
Assets must grow proportionally with sales.
Accounts Payable, Accruals, and Claims and Discounts Payable will also
grow proportionally with sales.
Assuming that Profit Margin is flexible.
Dividend Ratio will be maintained.
Holding all items that do not grow with sales constant.
All items that are infrequent, or rely on the firm’s decision at that moment
in time will also be held constant.
Assumption for growth rate:
o G1 = 7.83%
o G2 = 7.55%
o G3 = 7.43%
o G4 = 6.93%
o G5 = 6.50%
If AFN is negative, cash will be place into marketable securities.
No new debt will be issued, unless AFN calls for it.
CVS will not find it ideal to issue any new stock.
Statement of cash flows will be generated using forecasted financial
statements exclusively, disregarding any adjustments that CVS may have
made in the current year.
Forecast will be completed using the percent of sales method.
CVS Company Valuation 2015
Analysis of WACC
The weighted average cost of capital is a method of calculating whether a company
is earning a sufficient return to satisfy those providing its capital, i.e. its creditors
and investors. Each element is weighted according to its proportionate share of the
total capital. It is the cost of debt, equity and other types of capital weighted
according to their relative contribution to total capital. (Source 9)
For the fiscal period ending December 31, 2014, CVS Health capital structure was
majority weighted with 75% total common equity and 25% total debt. The optimal
capital structure would be the one that is able to minimize the weighted average
cost of capital; therefore, increasing the intrinsic value of the stock. The expected
stock return, which is calculated by adding next year’s dividend yield to the
dividend growth rate, is 9.12%. The beta 0.96 is less than 1.00; therefore, implying
that the stock is less unstable than the market. With the beta being less than 1.00,
the investment has less risk. The CAPM model is used to acquire the cost of equity,
which is 9.12%. According to the present capital structure, the weighted average
cost of capital is 8.48%.
Our method for calculating the WACC of CVS:
Calculation of WACC
Market Value of Equity
Short Term Debt
Long Term Debt
Total Book Value of Debt
Weight of Equity
Weight of Debt
$ 115,574.00
$
910.50
$ 12,268.00
$ 13,178.50
0.8976
0.1024
Cost of Equity
Risk Free Rate (10 Year Treasury)
Beta
Market Premium
Cost of Equity using CAPM
1.92%
0.96
7.50%
9.12%
Cost of Debt
Interest Expense
Book Value of Debt
Cost of Debt
$
615.00
$ 13,178.50
4.67%
WACC Calculation
Weight of Debt
Cost of Equity
Weight of Equity
Cost of Debt
Tax Rate
WACC
0.8976
9.12%
0.1024
4.67%
0.395
8.48%
CVS Company Valuation 2015
Capital Structure
The current capital structure for CVS, based on WACC weights, is approximately
90% equity and 10% debt. After looking at the other competitors in their peer
group, we feel that the current capital structure is equal to the optimal capital
structure.
Comparasion of WACC's and Weights
Company
Weight of Debt Weight of Equity WACC
CVS
10.24%
89.76%
8.48%
Walgreens
5.47%
94.53%
13.41%
United Health Group
13.28%
86.72%
6.45%
Rite Aid Corp.
40.72%
59.28%
33.01%
Express Scripts
18.37%
81.63%
6.79%
CVS Company Valuation 2015
Discounted Cash Flow Analysis
Discounted Cash Flow Analysis
Total Revenue
% of Growth
COGS
% of Revenue
Gross Profit
Gross Margin
SGA -Depreciation
% of Revenue
Depreciation and Amortization
% of Revenue
EBIT
% of Revenue
Interest Expense
% of Revenue
Net Interest (Income)
% of Revenue
EBT
% of Revenue
Less Taxes (Benefits)
Tax Rate
Net Income
Net Margin
Add back: Dep. And Amort.
Add back: Interest Expense
Operating Cash Flow
% of Revenue
Current Assets
% of Revenue
Current Liabilities
% of Revenue
Net Working Capital
% of Revenue
Change in Working Capital
Capital Expenditures(-SLB)
% of Revenue
Acquisitions
% of Revenue
Unlevered Free Cash Flow
Discounted Free Cash Flow
WACC
Years to Discount
2015
$ 150,276.21
7.83%
$ 122,923.56
81.80%
$ 27,352.65
18.20%
$ 16,286.99
10.84%
$ 1,577.90
1.05%
$ 9,487.76
6.31%
$
661.22
0.44%
-15
-0.01%
$ 8,841.54
5.88%
$ 3,492.41
39.50%
$ 5,349.13
3.56%
$ 1,577.90
$
400.04
$ 7,327.07
4.88%
$ 27,871.98
18.55%
$ 20,417.74
13.59%
$ 7,454.23
4.96%
$
513.76
$ 1,743.20
1.16%
$
826.52
0.55%
$ 4,243.59
2016
$ 161,625.16
7.55%
$ 132,206.82
81.80%
$ 29,418.34
18.20%
$ 17,500.83
10.83%
$ 1,713.23
1.06%
$ 10,204.28
6.31%
$
711.15
0.44%
-15
-0.01%
$ 9,508.13
5.88%
$ 3,755.71
39.50%
$ 5,752.42
3.56%
$ 1,713.23
$
430.25
$ 7,895.89
4.89%
$ 29,837.10
18.46%
$ 21,864.55
13.53%
$ 7,972.55
4.93%
$
518.32
$ 1,874.85
1.16%
$
888.94
0.55%
$ 4,613.78
$3,920.97
8.48%
2
2017
$ 173,634.25
7.43%
$ 142,030.07
81.80%
$ 31,604.18
18.20%
$ 18,783.82
10.82%
$ 1,857.89
1.07%
$ 10,962.48
6.31%
$
763.99
0.44%
-15
-0.01%
$ 10,213.49
5.88%
$ 4,034.33
39.50%
$ 6,179.16
3.56%
$ 1,857.89
$
462.21
$ 8,499.26
4.89%
$ 31,916.52
18.38%
$ 23,395.51
13.47%
$ 8,521.01
4.91%
$
548.46
$ 2,014.16
1.16%
$
937.62
0.54%
$ 4,999.01
$3,916.42
8.48%
3
Disco
2018
$ 185,664.52
6.93%
$ 151,870.64
81.80%
$ 33,793.88
18.20%
$ 20,066.69
10.81%
$ 2,005.18
1.08%
$ 11,722.02
6.31%
$
816.92
0.44%
-15
-0.01%
$ 10,920.09
5.88%
$ 4,313.44
39.50%
$ 6,606.66
3.56%
$ 2,005.18
$
494.24
$ 9,106.07
4.90%
$ 33,999.62
18.31%
$ 24,929.17
13.43%
$ 9,070.44
4.89%
$
549.43
$ 2,153.71
1.16%
$ 1,002.59
0.54%
$ 5,400.34
$3,900.27
8.48%
4
2019
$ 197,726.87
6.50%
$ 161,737.45
81.80%
$ 35,989.42
18.20%
$ 21,350.62
10.80%
$ 2,155.22
1.09%
$ 12,483.58
6.31%
$
870.00
0.44%
-15
-0.01%
$ 11,628.58
5.88%
$ 4,593.29
39.50%
$ 7,035.29
3.56%
$ 2,155.22
$
526.35
$ 9,716.86
4.91%
$ 36,088.26
18.25%
$ 26,466.92
13.39%
$ 9,621.34
4.87%
$
550.90
$ 2,293.63
1.16%
$ 1,047.95
0.53%
$ 5,824.38
$3,877.85
8.48%
5
CVS Company Valuation 2015
Discounted Cash Flow Analysis
Discounted Cash Flow Analysis Assumptions
Tax Rate
Risk Free Rate
Beta
Market Risk Premium
% of Equity
% of Debt
Cost of Debt
CAPM
WACC
39.50% Terminal Growth Rate
1.92% Terminal Value
0.96 PV of Terminal Value
7.50% Sum of PV FCFs
89.76% Firm Value
10.24% Total Debt
4.67% Cash and Cash Equivalents
9.12% Market Capitalization
8.48% Fully Diluted Shares
Implied Price
Current Price
Overvalued
4.8%
$ 166,071.12
$110,569.60
$ 15,615.52
$126,185.12
$ 13,178.50
$ 2,481.00
$113,006.62
1,140.00
$
99.13
$
101.73
2.56%
Based on the above discounted cash flows, our findings show that CVS is fairly
priced, maybe slightly overvalued by a very marginal percentage. The current stock
price is approximately $101, which we believe fairly represents the PV of future
cash flows.
Assumption:
The terminal growth rate is 4.8%.
CVS Company Valuation 2015
Dividend Discount Model Calculations
Intrinsic Stock Value
Dividend Discount Model
Year
Assumptions
Rf
Market Premium
Beta
Required Return
1.92%
7.50%
0.96
11.4200%
Market Portfolio Dividend Growth Rate
Retention Rate
0.77
Profit Margin
3.33%
Asset Turnover
1.91
Financial Leverage
1.79
Dividend Growth Rate
Growth Rate
Using the dividend discount model we calculated that
the implied price is $98.43, which is in line with the
implied price calculated using the DCF method. This
essentially shows that the current stock price of CVS,
approximately $101, is a fair price for the future
performance of the stock. Dividend Growth Rate
calculated using the PRAT model.
101.73
11.4200%
1.1
10.23%
Dividend Growth Rate Forecast
Year
1
2
3
4
5
Value
g1
g2
g3
g4
g5
NPV
$98.43
8.77%
$
Vcs
CF
1.1
1.19643042
1.19643042
1.30568639
1.30568639
1.42969077
1.42969077
1.57069664
1.57069664
1.73134923 160.118325 161.849674
1.90843354
Vcs(0)
Gordon Growth Model
Current Price
Rate
Do
Dividend
0
1
2
3
4
5
6
g
8.77%
9.13%
9.50%
9.86%
10.23%
CVS Company Valuation 2015
Relative P/E’s including PEG’s
Relative P/E and PEG Ratios
Year
CVS
2010
2011
2012
2013
2014
Average
13.98
15.93
15.94
19.09
24.2
17.828
Historical P/E Ratios
Walgreens United Health Group Rite Aid. Corp. Express Scripts
12.68
8.8
0
4.82
11.98
10.74
0
17.71
14.75
10.27
0
29.41
18.81
13.7
15.33
31.15
30.26
17.74
31.08
31.85
17.696
12.25
9.282
22.988
CVS’s average P/E ratio for the last 5 years is 17.82, which means that investors
are paying $17.82 for every dollar that CVS earns. Their P/E ratio is on average
higher than most of their competitors, which implies that higher growth rate is
anticipated in the future for CVS when compared against its competitors.
Current P/E and PEG Ratios
CVS
Walgreens
UNH
Rite Aid Corp.
Express Scripts
Current P/E and PEG Ratios
P/E Ratio
PEG Ratio Assumptions
25.81
2.3 PE/5 YR EBITDA growth rate
40.36
2.05
20.59
1.57
27.30
1.59
31.82
1.54
CVS’s PEG ratio seems fairly high at 2.3 compared to most of the other
competitors who had PEG’s closer to 1.5. The PEG ratio for CVS was
calculated by dividing the current P/E ratio with the 2014 5YR average
EBITDA growth rate. A value above 1.00 generally indicates that the stock
price is overvalued. The PEG ratio shows that CVS’s stock price is higher than
its intrinsic value, however based on our analysis we disagree.
CVS Company Valuation 2015
Recommendation
Based on our analysis of the Discounted Cash Flows, and the Dividend Discount
Model our group believes that the current stock price is an accurate reflection of
future earnings.
We believe CVS will continue to generate excellent revenues as it is well established
and has a proven business model. While the Drugstore market is fiercely
competitive we feel that CVS has enough brand awareness and product
differentiation to remain stable. As CVS continues to grow their Specialty Drug
segment we feel that their revenues will be positively affected. While our analysis
shows that CVS is currently correctly priced, we feel that CVS will definitely benefit
in the future from macroeconomic factors, like the aging population, brand name
drugs transferring over to generic, and the changing landscape of US Healthcare. We
recommend a HOLD.
CVS Company Valuation 2015
Bibliography
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<http://finance.yahoo.com/q?s=CVS&fr=uh3_finance_web&uhb=uhb2>.
4.) "Investors." Investor Relations. N.p., n.d. Web. 07 Apr. 2015. (10k Report)
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(Quarterly) (CVS). N.p., n.d. Web. 07 Apr. 2015.
<http://ycharts.com/companies/CVS/gross_profit_margin>.
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<http://marketingmixx.com/marketing-basics/swot-analysis-marketingbasics/176-cvs-caremark-swot-analysis.html>.
9.) Weighted Average Cost Of Capital (WACC) Definition | Investopedia."
Investopedia. N.p., 18 Nov. 2003. Web. 08 Apr. 2015.
<http://www.investopedia.com/terms/w/wacc.asp>.
NOTE:
All tables were constructed in Excel by our group, based on numbers pulled
from Capital IQ, or GuruFocus.