CVS Stock Report - Washington State University€¦ · 2" "!!Date:!April!9,!2015!! ! ! ! Analyst!Names:BeauBowmanandBoYang! CIFStockRecommendation!Report!(Spring2015)! Company!Name!andTicker:!CVS!Health!Corp.!

1

Stock Analysis conducted by the Cougar Investment Fund class at Washington State University

2

Date: April 9, 2015

Analyst Names: Beau Bowman and Bo Yang

CIF Stock Recommendation Report (Spring 2015)

Company Name and Ticker: CVS Health Corp.

Section (A) Investment Summary

Recommendation Buy: Yes Target Price: $115.00

Stop-‐Loss Price: $95.00

Sector: Consumer Staples

Industry: Retail/ Health Care Plans

Market Cap (in Billions): 115.82

# of Shrs. O/S (in Millions): 1,169 million

Current Price: $102.93

52 WK Hi: $105.46

52 WK Low: $72.37

EBO Valuation: $80.80

Morningstar (MS) Fair Value Est.: $93.00

MS FV Uncertainty: Medium

MS Consider Buying: $65.10

MS Consider Selling: $125.55

EPS (TTM): 5.88

EPS (FY1): 5.16

EPS (FY2): 5.87

MS Star Rating: Two Stars

Next Fiscal Yr. End ”Year”: 2015 “Month”: December (1)

Last Fiscal Qtr. End: Less Than 8 WK:

YES

If Less Than 8 WK, next Earnings Ann. Date:

May (5)-‐10-‐2015

Analyst Consensus Recommendation:

Buy/Over perform Forward P/E:

17.57 Mean LT Growth:

14.84 PEG:

1.18 Beta:

1.00 % Inst. Ownership:

90.24% Inst. Ownership-‐ Net Buy: YES

Short Interest Ratio: 3.30

Short as % of Float: 1.10%

Ratio Analysis Company Industry Sector

P/E (TTM) 25.96 29.40 40.55

P/S (TTM) 0.84 0.64 5.79

P/B (MRQ) 3.10 2.89 37.53

P/CF (TTM) 17.80 16.44 35.79

Dividend Yield 1.36 1.05 2.15

Total Debt/Equity (MRQ) 34.13 17.66 33.88

Net Profit Margin (TTM) 3.33 2.37 13.38

ROA (TTM) 6.37 5.25 30.93

ROE (TTM) 12.24 11.53 82.31

3

Investment Thesis Pros:

• Strong Fundamental valuation when correcting for more realistic growth rates.

• Pharmaceuticals, directly affecting CVS sales, is expected to growth in coming years.

• Involvement in retail as well as

Pharmaceutical planning gives competitive advantage.

• Analysts are extremely bullish

for the stock.

• Recent increase in prescription plans and customers.

• Positive growth in stock price over the past 5 years

• CVS has consistently beaten

earnings and revenue estimates within the last 5 quarters.

• Large claim amounts give CVS

favorable drug pricing with its suppliers.

Summary: We believe CVS Health has seen strong growth in the past and will continue this growth into the future making it a strong investment for the Cougar Investment Fund. Company Profile: CVS Health combines one of the largest retail pharmacy companies in the United States with one of the largest pharmacy benefit managers (PBM). This two-‐pronged approach is unique in the sector. This manage more than 1.1 billion prescriptions per year and operate more than 7800 retail pharmacies in addition to over 500 MinuteClinic retail health clinics nationwide. Fundamental Valuation: The fundamental valuation produced a price of $80.80, which is below the current stock price of $102.93. Changing ROE and Long-‐term growth rate to slightly higher and more accurate numbers produced a stock value of $104.81, which is a far better valuation. Overall fundamentally the stock seems fairly valued or if growth remains strong the stock could very well be undervalued and a good buy. Relative Valuation: The relative valuation proved to indicate the stock being fairly or slightly undervalued compared to equally distributed competitors from both sides of CVS’s business. There was a strong comparability within all the competitors with very minimal outlying numbers that may skew the valuation. We are confident in our relative numbers used in the relative valuation, which produced positive indicators for CVS. Revenue and Earnings Estimates: CVS has positively surprised in all of its last 5 quarters in terms of revenue estimates and also has positively surprised in four out of five of its earnings estimates. Earnings per share and sales are expected to increase in 2015 and 2016. No revenue or earnings down revisions were seen in the last four weeks, only up revisions especially for 2016 indicating strong growth.

4

Cons:

• Generic drug trend may come to a close causing losses to CVS.

• Competition within the industry

is fierce both on the pharmaceutical and retail sides of CVS’s business.

• Retail network is slightly

smaller for CVS than for its main competitor Walgreens.

• New Lawsuits against CVS could

pose potential expenses and bad press for the company.

• The stock is currently sitting

very near its 52-‐week high meaning it may be an expensive buy if growth does not continue.

Analyst Recommendations: Analysts are incredibly bullish on CVS. The current mean rating is at a 1.72 (with a 1 being a buy) with 25 analysts currently weighing in. MorningStar’s analysts are only slightly more skeptical with 4 suggesting a buy, 2 suggesting a hold, and 1 being probably the only analyst on the market to foresee underperformance. Institutional Ownership: Institutional ownership is very high at 90.24% meaning that many institutional investors see CVS as a good investment. The top 10 institutions in terms of percentage ownership own 29.96% of CVS but the largest (Vanguard Group) only holds 5.99%. Mutual funds hold 46.60% of CVS suggesting positive outlooks for stable growth with the stock. Short Interest: CVS has a lower short ratio than its competitor Express Scripts Holding Co. but a higher short ratio than its main retail competitor Walgreens Boots Alliance. Although Walgreens just became a subsidiary of Walgreens Boots Alliance. Stock Price Chart: CVS has outperformed their biggest competitors of Walgreens and Express Scripts as well as the S&P 500 and the staples index by a large margin in terms of 5-‐year stock price. They have seen constant positive stock price growth since 2011 with very low serious volatility.

5

Section (B) Company Profile

(B-‐1) Profile CVS Health Corporation is the largest integrated pharmacy health care provider in the United States. They rank the second largest pharmacy chain based on revenue and ranks twelfth largest company in the world in 2014. They are described as a large growth style stock because of their large US presence and large growth potentials. The company sells prescription drugs, beauty products, as well as a multitude of other convenience food and discretionary items in their physical convenience stores. They also offer a large network of medical clinics called MinuteClinc’s, which are able to provide healthcare services. They are headquartered in Woonsocket, Rhode Island and have over 7600 stores and 80,000 employees nationwide.

Pharmacy Services Segment

This business segment includes employers, insurance companies, unions, government employee groups, managed care organizations, as well as individual customers across the United States. This segment provides Pharmacy Benefit Management (PBM), which in effect is the companies management of pharmaceutical costs and the improvement of health care outcomes. This segment works with clients to design and monitor pharmacy benefit plans for effectiveness. This includes selecting drugs and providing specialty pharmacy services to accommodate even the most complex customer needs. This segment is also not affected by seasonality.

Retail Pharmacy Segment

The Retail segment of CVS operates in 44 states as well as the District of Columbia, Puerto Rico, and Brazil. This segment contains their brick and mortar stores that constitute the face of the company. They sell over-‐the-‐counter and personal care products as well as general goods such as greeting cards and convenience foods. The Pharmacy segment of their brick and mortar stores represents about two thirds of their revenue from the retail pharmacy segment. The stores contain MinuteClinics, which are staffed by nurse practitioners and physician assistants who can diagnose and treat minor health conditions and ailments. In general this segment is also not affected by seasonality. The following is the revenue breakdown in the Retail Pharmacy Business Segment:

6

Net Revenues Segment Breakdown

(Totals in Millions) 2013 2012 2011 Pharmacy Services Segment $76,208 $73,444 $58,874 Retail Pharmacy Segment $65,618 $63,641 $59,579

Competition:

Pharmacy Services Competition

Competition in this segment is fierce due to services such as Express Scripts, OptumRx, or Catamaran which all provide PBM services. Some of these companies has the large national infrastructure that makes competition hard for CVS Health Corporation.

Retail Pharmacy Competition

The retail business is also highly competitive by nature. Factors such as location, customer service, product selection, and convenience all come into play amongst competing retailers. CVS Health Corporation competes with discount retailers, drugstore chains, supermarkets, Internet retailers, and other pharmacies in their retail segment.

Sensitivity

7

CVS Health Corporation is subject to many different environmental and economic risks that can potentially sway the company. Recently they have experienced an increase in the demand for prescription drugs from aging baby boomers as well as the expansion of government spending on healthcare. They sit at a consensus beta very close to 1.00 so the stock essentially tracks the S&P 500 pretty religiously. Since they are also tied directly into the pharmaceutical industry, when drug manufacturers suffer CVS generic retail products will prosper. Another large influence to CVS is regulations set about by the government.

Government Regulation

New government regulation through state, federal, or local legislation proves to be one of CVS Health Corporation’s biggest risks because they are radically unpredictable. Among regulations by the ERISA and FDA as well as other regulatory groups, CVS has a large number of legal statues to stringently follow. The recent passing of the Health Care Reform Legislation in 2010 is directed at every person having health care by 2014. Many of the provisions written into the healthcare reform directly impact some services of CVS while others indirectly impact their business practices and healthcare plans. The list of various ongoing legislative bills in substantially long but CVS ensures that they are diligently conforming their business to all the constantly changing safety and legal standards.

Recent Developments

CVS has had a few major and notable developments within the last couple years:

• By October 1, 2014 CVS decided to drop the selling of tobacco products entirely from their stores stating that tobacco and health simply could not coexist within their business model.

• In 2014 they also changed their corporate name to “CVS Health”. • In 2014 CVS purchased the Miami based Navarro Discount Pharmacy, giving them 33

Navarro locations as well as their specialty pharmacy that serves patients with complex or chronic diseases. They have also decided to keep the Navarro Discount Pharmacy name.

• In a case brought by the SEC, CVS was recently ordered to pay $20 million to settle fraud charges due to the defraudment of investors in 2009 during a debt offering and the improper accounting of an acquisition.

8

(B-‐2) Revenue and Earnings History

(EPS is GAAP diluted in the chart above)

Total Revenue and EPS

(Totals in Millions) Revenue Earnings Per Share

Year 2014 $139,367 3.973

Year 2013 $126,713 3.753

1) What are your observations on revenue? Was there a notable up-‐ or down-‐trend, year-‐over-‐year? Was there seasonable pattern? Revenue has had a very consistent increase from 2013 to 2014 with the only decrease in revenue was between the December 2013 quarter and the March 2014 quarter and the decrease was not very significant. As is typical in the staples industry there is not any real seasonal pattern present.

9

2) Likewise, what are your observations on earnings?

Earnings per share had pretty normal increases in 2013 from .769 to 1.050, which is about a 37% increase within the year. In 2014 EPS dropped from the ending 2013 number and then rose only to drop again in the September 2014 quarter and then continue to increase to a final 1.149 for the 2014-‐year end. This gives a two-‐year cumulative increase of 49.4% in EPS.

(B-‐3) Most Recent Quarterly Earnings Release

1) When was the company’s most recent earning release? The most recent earnings report was released on February 10, 2015

2) In that earnings report, was reported revenue a (1) beat, (2) match, or (3) miss from consensus estimate? CVS Revenues for the most recent 2014 earnings report beat consensus estimates.

3) Likewise, was reported earnings a (1) beat, (2) match, or (3) miss from consensus estimate? In the most recent report CVS matched EPS estimates exactly.

4) What did the management attribute the beat/miss to? Management attributed the positive performance to growth driven by specialty pharmacy and increased volume in claims. The increase in generic dispensing rate also contributed to the increase. Overall the positive economic growth and good management guidance produced positive results for the quarter and year.

5) Did the management provide guidance about their current quarter and their outlook for the year? What were the key points of the guidance? During the conference call CEO Larry Merlo has very high expectations for 2015, highlighting $7 billion in new business to start the year as well as predicted increases in specialty revenues in 2015. Even with the exclusion from selling tobacco out of its stores, management stated that it has affected their revenues less then they had anticipated. Overall CVS upper management is extremely optimistic about the next couple of years.

6) How did the stock react to that earnings release? The stock actually reacted very positively to the earnings release opening at $100.53 on February 10, 2015 and closing at 104.19 by March 2, 2015

10

7) Other observations worth noting? Overall CVS has seen substantial growth over the years and management has very strong confidence that the performance of the company will only continue to beat estimates and increase.

Section (C) Fundamental Valuation (EBO)

Inputs (provide below input values used in your analysis)

EPS forecasts (FY1 & FY2): FY1: 5.16 FY2: 5.87

Long-‐term growth rate: 14.84%

Book value /share (along with book value and number of shares outstanding):

Book value: 37958.00

# of shares outstanding: 1140.00

Book value / share: 33.296

11

Dividend payout ratio: 27.51%

Next fiscal year end: 2015

Current fiscal month: 4

Target ROE: 11.50%*

Discount rate 8.50%

Input for discount rate:

Risk-‐free rate: 2.52%

Beta: 1.00

Market risk premium: 8.50%

Output:

Above normal growth period chosen: 7

EBO valuation (Implied price from the spreadsheet): $80.80

1) Comment on the fundamental value obtained in relation to the stock’s current price and its 52-‐week price range. The fundamental value obtained is lower than the current price (103.13). This price is however within the 52-‐week range (72.37-‐105.45). This fundamental value would mean that the stock itself is currently overvalued.

2) What might be “soft spots” of the inputs? And why? Some of the soft spots in this fundamental evaluation are as follows:

Long-‐Term Growth Period-‐ We chose a long-‐term growth rate of 7 years because CVS is a non-‐cyclical stock so growth rates tend to be more consistent long term. Expected Return on Market-‐ The expected return on market we chose was 8.5%, which is on the lower end of analyst’s predictions for the market in the short-‐term years. Consensus Mean Estimates-‐ These estimates have the potential to be inaccurate they may only account for long term trends instead of the short term increases that CVS has been having with its EPS. Target ROE-‐ * This may be the biggest soft spot in the fundamental valuation because it is relatively low in comparison to the twelve month trailing average (12.24%) as well as the industry ROE (11.50%). A higher ROE than the current 11.50% would value the stock at a higher price.

12

Sensitivity Analysis

1) Explain the input values used in sensitivity analysis. Compare the fundamental values obtained here in relation to the value from the base case The target ROE, which was changed to the TTM ROE of the company because we believed the industry, average to simply be too low for CVS and their current success. Long-‐term growth rate was changed to see how the growth rate period would affect the fundamental valuation of the stock price, although we still do believe the 7-‐year growth period to be the best option. Long term Growth rate was also changed to account for the potential of extraordinary growth that the company may experience in the coming years.

2) Other observations worth noting

By management opinion and other fundamental evidence such as the momentum trend CVS has experienced by beating estimates it seems that their long-‐term growth rate as well as their target ROE should be higher in order to more accurately value the stock on its upward trend.

EBO valuation would be

$71.22 if changing above normal growth period to 5

$66.92 if changing above normal growth period to 4

$85.70 if changing target ROE to 12.24%

$90.91 if changing Long-‐Term Growth rate to 20%

13

Section (D) Relative Valuation

1) Discuss various valuation multiples of your stock and its peers. Comment if any of these stocks have multiples far off from the others and explain whether it makes sense.

Market Cap: Compared to competitors CVS has a substantial size above all of its competitors excluding the large conglomerate Wal-‐Mart. This gives them an advantage against competition because of the sheer size of the company.

Current Price: CVS currently has the highest price ($102.93) compared directly against competitors. This is misleading however because the price of a stock does not simply determine the worth of that stock.

Earnings Estimate FY2: CVS has a very high Earnings Estimate for FY2 (5.87) compared with its other competitors in the relative valuation. Express Scripts is the only competitor with a higher forecasted Earnings Estimate at 6.01, which is not too much higher than CVS.

Forward P/E: The forward P/E ratio for CVS is right about the companies real P/E, which is good because it indicates future growth, though it would be better, is the Forward P/E was below the current P/E.

Mean LT Growth Rate: Long-‐term growth rate of 14.84% is the second highest among competitors right behind Catamaran’s LT growth rate of 19.16%. This is positive for CVS because it indicates they are expected to grow more than competitors in the future.

PEG: The PEG ratio indicates the stock price relative to earnings growth and the earnings multiple of a company. A PEG of a 1 would mean the stock is at equilibrium of value and anticipated growth. CVS’s PEG of 1.18 is the second lowest to its competitors and very near to 1 meaning it is relatively fairly valued. Catamaran is the only company with a lower PEG at 1.06.

14

P/B: CVS’s Price to Book ratio is sitting right about in the middle of its competitors at a value of 3.10. This is indicative of neither overvaluation nor undervaluation. Realistically this value of a 3.10 is actually relatively low which means the company is more than likely fairly valued or very slightly overvalued in the same manner all of its competitors are.

ROE: CVS has an ROE of 10.64% with its 5yr average. However, the TTM ROE of CVS is actually about 1.60% higher at 12.24% meaning that the company has been improving on its returns on equity. Comparing the 12.24% to its competitors CVS beats its main PBM competition but does not beat the very large ROE’s of their Wal-‐Mart and Walgreens retail competition.

P/S: A low Price to Shares is a positive sign for growing companies. CVS does have a very low P/S of 0.84 but it is the second highest compared to its competitors. This indicates that the stock should experience stock price growth in the short term but some of the competition companies may experience slightly better price growth.

P/CF: A low price to cash flow multiple indicates that a company is producing ample cash flow to sustain the price of the stock. CVS has a relatively low P/CF multiple of 17.8, which is slightly higher than Express Scripts (14.33) but lower than Catamaran (22.02) and Walgreens (27.45).

2) Discuss the various implied prices of your stock derived from peers’ (“Comparables”) multiples. Compare these implied prices to current price and 52-‐week high and low. How different are the prices derived from the various valuation metrics? Note any valuation metrics that seem to yield outlier prices and explain whether it makes sense. P/E Forward Mean Price ($103.69)-‐ The mean for the P/E forward price based on CVS’s competitors is only about a $1 off from the actual price suggesting that the current price is very accurate relative to competitors Forward P/E ratios. This is a good predictor because all the competitors have very comparable forward P/E ratios. PEG Mean Price ($186.84)-‐ The competitor based price derived by using the PEG ratio indicates a price that is far above CVS’s current price. This would indicate that the stock is heavily undervalued but because of Wal-‐Mart’s extremely large PEG (4.95) this valuation cannot be considered as completely accurate. P/B Mean Price ($104.34)-‐ The competitor derived P/B price is only slightly about the CVS current price by about $2.00, which could indicate an undervaluation of the CVS stock. This looks like a fairly accurate measure because of the P/B ratios that are very comparable across competitors. P/CF Mean Price ($106.67)-‐ The Price to Cash Flow multiple implied price indicates a number around $4.00 higher than the current CVS stock meaning a potential current undervaluing of the CVS stock price. This measure also seems plausible in nature because all

15

of the competitor P/CF multiples are within reasonable ranges as well as comparable to one another.

3) Compare your findings with comments from analysts from Morningstar Direct and other online resources. Many of these finding are in line with analyst predictions that the stock is set to grow and that the stock price may currently be slightly undervalued. Analysts are definitely bullish about CVS and we believe that this is due to the positive indications given by comparing fundamental values to competitors that are similar to our relative valuation.

4) Other observations worth noting? Wal-‐Mart, due to its sheer size compared to the other companies in the valuation, may slightly skew some of the multiples in the relative valuation although after looking at the completed sheet they do not appear inaccurately skewed.

Section (E) Revenue and Earnings Estimates

(E-‐1) “Historical Surprises” Table

16

Analysis

From the chart above, CVS has the tendency to slightly beat the estimations over the years. As we can see that, the revenue they make rose from $32830 million to 37055 million and earnings (per share) goes from 1.12 to 1.21 respectively. So generally speaking, CVS did all positive surprise in the latest 5 quarters. CVS made the most notable surprise in quarter ending Jun-‐14 with a 3.37%. After that, CVS followed with a more stable surprise percentage until the recent quarter ending in Dec-‐14 with a surprise percentage of 2.71. Very interesting to notice that the CVS Company stopped selling tobacco products since Feb 2014. However, there was not that significantly increment at that moment but after that in June, it dramatically raised up.

Overall, their stock price increased with the positive surprise percentage.

(E-‐2) “Consensus Estimates Analysis” Table

17

Percentage difference of the HIGH estimates from Mean (Revenue)

Q1: 1.513% Q2: 0.7909% FY1:0.6716% FY2: 3.061%

Percentage difference of the LOW estimates from Mean (Revenue)

Q1: 1.122% Q2: 1.741% FY1:1.454% FY2: 4.979%

Percentage difference of the HIGH estimates from Mean (EPS)

Q1: 4% Q2: 2.206% FY1:0.7752% FY2:3.237%

Percentage difference of the LOW estimates from Mean (EPS)

Q1: 7.2% Q2: 2.941% FY1:0.7752% FY2:5.792%

Analysis

It is clear that the percentage gap come from FY1, FY2 are mostly not that huge. Most notable differences are in low estimates from Mean (EPS). But generally speaking, it stays the range between the least 0.7% to at most 7%. The deviations from the EPS and revenue are relatively small and there is only 5 analysts provide the estimations for LT Growth rate which is significantly less than the estimations from revenue and EPS.

18

(E-‐3) “Consensus Estimates Trend” Table

Analysis

The mean estimates of all the analysts seem to be trending up from the sales 1 year ago. The trends are more noticeable in FY1 and FY2 compared with the recent period. Looking at EPS, it shares the similar pattern with the revenues which are all up trend. Overall speaking, the trend is remained constantly in the current period both on FY1, FY2 and Q1, Q2.

19

(E-‐4) “Estimates Revisions Summary” Table

Analysis

It’s good to see that all analysts who made estimates revision moved them up. Two analysts moved their estimate up within the last four weeks in revenue along with 3 moved up in EPS. One analyst moved the earnings estimate up in last week and there is no information in the revenue section. All analysts who revised their estimations is a positive indicator for the investors because they convinced a positive outlooks.

20

(E-‐5) “Consensus Earnings Revisions”

Revision Date

Revision Type

Revision Up/Down

Current

Previous

% Change

# of Analysts Reporting

April 7th Up 1/0 $1.08 $1.08 0.09 21 1) Make note of the company’s (1) last earnings reporting date, and (2) next earnings

reporting date. (1) CVS’ last earnings reporting date was 02/10/2015 for their Q4 in 2014 (2) CVS’ next earnings reporting date will be 05/01/2015 for their Q1 in 2015.

2) Review revisions day by day, and comment on (1) whether they tend to be clustered, and (2) if clustered, were they near earnings reporting date?

There was only one revision made by analysts’ estimates and it was two months after CVS released their Q4 earnings report in 2014.

3) Were there any greater than 10% consensus revisions? What is the maximum % consensus revision?

No. The only revision was a 0.09% upgrade in the estimate.

4) Observe stock price chart, how did the stock trade around dates of greater than 10% consensus revisions?

The stock never revised greater than 10%.

21

Section (F) Analysts’ Recommendations

(F-‐1) Reuters Most Recent Three Months Analysts Recommendations

1) Review the trend of analyst recommendations over the last three months. Is there a notable change of analyst opinions, turning more bullish or bearish?

Generally speaking, the trend doesn’t change with a majority of analysts suggest to buy and state the stock will outperform in the future. Most of the analysts favor the stock and only three of them suggest to hold rather than buy option. 2) How many different ratings out of the five possible ones did the company receive

currently, one, two, and three months ago? Currently there are 10 analysts suggest to buy and 12 state it will outperform whereas 3 recommend to hold. There is no significantly change in this 3 months period. 3) Is there a notable trend of opinion convergence or divergence? There has been no notable trend of opinion since most of the analysts constantly recommend to buy and outperform.

22

4) Cross check (1) Morningstar analyst’s research report; and (2) media or other analysts’ comments from online financial sites. Is what you see here consistent to comments elsewhere?

(1) There are totally 7 analysts in Morningstar provide their opinions. 4 of them suggest to buy

and 2 recommend to hold, only one says the stock will underperform. The overall rating of the stock is 4 out of 5(5 strongly buy).

(2) 25 analysts provide information for CVS on Yahoo finance. 9 say strong buy and 13 suggest to buy whereas only 3 recommend to hold.

All three media consistently insist on buying this stock and only tiny part of the analysts hold the opinion that the stock will underperform or old. 5) Other observations worth noting?

There was totally 26 analysts from Reuters provided their recommendations 3 months ago, but there are only 25 in the current period, so it’s slightly affect the comparison between these data.

(F-‐2) Most Recent One-‐Month Analysts Upgrades/Downgrades

1) Make note of the company’s (1) last earnings reporting date, and (2) next earnings reporting date.

There are no upgrades and downgrades from CNBC in one-‐month period.

2) Add up the number of upgrades on weekly basis. Do the same for downgrades. Were there more up-‐ or down-‐grades? Were there any consistent trend you observe in the recent month? Were there any up-‐ or down-‐grades of more than “one grade”?

There is no upgrades and downgrades from CNBC in one month period.

3) Were there clustering of up-‐ or down-‐grades? If so, were they clustered around earnings report date?


23

4) Observe stock price chart, how did the stock trade around dates of up-‐ or down-‐grades?


5) Other observations worth noting?

The stock price in the one-‐month period fluctuated up and down and began to rise steadily in the recent days.

Section (G) Institutional

24

Combine information provided in all three sections to discuss:

1) Whether institutions, on net basis, have been increasing or decreasing ownership and whether the change can be considered as substantial

The number of net buyers has been increasing in the recent period. The three month change was 11 which indicates that there has been a slightly increment in positions than decreased positions. Overall speaking, the change represents 0.6% of the total holders, which won’t be considered as substantial. 2) Whether the stock has sizable institution interests/support CVS owns a dramatically high institutional ownership at 90.24% which indicates that the stock is not only held the majority by professionals but also those experts see values in this stock. Vanguard Group and FMR, LLC are two largest ownership holders for this stock, with a percentage of 5.99% and 5.14% respectively.

25

3) The extent of the (> 5%) owners by adding up all >5% ownership, and make an effort to

identify those that are mutual funds

Analysis There is no mutual fund owns over 5% ownership. The largest two mutual fund holders are Vanguard Total Stock Market Index Fund and Fidelity Contrafund Inc. with 1.7% and 1.3% respectively. Vanguard/Wellington Fund Inc. and Vanguard 500 Index Fund followed with a percentage of 1.17 and 1.03. The rest of other holders are less than 1%, which refer to a less significantly, effect. 4) Other observations worth noting? Vanguard and its subsidiaries seem to favor this stock; they hold totally 5.74% ownership and 5 out of 10 top mutual fund holders are related to the Vanguard Group.

26

Section (H) Short Interest

(H-‐1) Short Interest Data

CVS

27

Express Scripts Hldg (ESRX)

28

Walgreens Boots Alliance, Inc. (WBA)

29

(H-‐2) Short Interest Data

CVS

Avg Vol Avg Vol Shares Float (3 month) (10 day) Outstanding

4,474,730 3,546,790 1.14B 1.14B

Shares Short Short Ratio Short % of Float Shares Short (As of Mar 13,2015) (As of Mar 13,2015) (As of Mar 13,2015) (Prior Month)

12.94M 3.30 1.10% 14.48M

Express Scripts Hldg (ESRX)


3,750,700 3,825,860 726.90M 725.20M


18.46M 5.30 2.50% 16.67M

Walgreens Boots Alliance, Inc. (WBA)


4,986,480 4,444,130 NaN 748.32M


12.09M 2.60 1.40% 9.97M

30

1) Make note of the company’s (1) last earnings reporting date, and (2) next earnings reporting date.

(1) CVS’ last earnings reporting date was 02/10/2015. (2) CVS’ next earnings reporting date is expected on 05/01/2015 2) Discuss market sentiment on the stock based on the short interest statistics, recent trend

reported in in (H-‐1) and (H-‐2)? Has the sentiment turned more bullish or bearish over the last year? How about in more recent month and why?

CVS has the lower short ratio than ESRX but higher than WBA. Since the nation’s largest drugstore chain said that shares long traded under the symbol “WAG”, have been converted to the ticker symbol of the new company called Walgreens Boots Alliance Inc. (WBA). So Walgreens is now a subsidiary with a lower short ratio. 3) From (H-‐1), observe “short interest” and “# of days to cover” values for two reporting

dates immediately before and one reporting date immediately after earnings report. (1) Were there notable increase or decrease in the values, right before or right after earnings report? (2) Observe stock price chart and comment on how stock traded around those dates.

(1) Looking at the short interest date above, we observed that for the current earnings

reporting date on 02/10/2015, short interest made a 16.26% deduction from 1/30/2015 to 2/13/2015. The days to cover decreased by 1.3 days during that period. Back to their reporting in 2014, we find that there was a slightly 2.6% increment after their reporting on Q1, 11.68% increment after the report for Q2 and a 15.58% decline after Q3 reporting.

(2) The stock price was increased by 0.3% at the recent Q4 reporting of 2014. Most notable

change was on their Q3 reporting of 2014, there was a 3.428% increment of stock price during that period.

4) Other observations worth noting? “Walgreen closes Alliance Boots deal, stock to start trading under new ticker symbol,”WBA”.”

31

Section (I) Stock Charts

(I-‐1) A three months price chart

(I-‐2) A one-‐year price chart

32

(I-‐3) A five year price chart

1) (I-‐1) – (I-‐3) Discuss what you observe from the above stock price charts.

By looking at 3 months price chart, CVS beat all of the others except one of the competitors WBA. Since Alliance Boots actually merged with WBA in the late of 2014, so it would be an indicator to affect the stock price. In 1 year and 5 years condition, it is obviously to see that, CVS beat all of others since 2012.Overall speaking, CVS is relatively profit stable compared with other competitors both in long-‐term and short-‐term position. So far, we are expecting to see a continuously growth for CVS. 2) Other observations worth noting? The quit on selling tobacco products for CVS seemed not affect much on its stock price.

33

(I-‐4) Technical Indicators Short-‐term moving average and relative strength index indicators

Long-‐term moving average and relative strength index indicators

1) Discuss your findings from these sets of technical indicators. Compare your findings here

to findings from fundamental analysis. Are findings from technical analysis supportive of your other findings?

2) Short-‐term:

In the 1 year short-‐term period, we find the stock price remained the trend of fluctuating up and down until Oct. 2014. The decline happened in that month indicates a bearish position for the stock mainly due to the quit selling of tobacco products. After that deduction, the stock price started fluctuating up and down again with the SMA, until another drop on early of 2015.

34

Looking at the RSI technical indicator, what we get is 61.71 from the range of 23.75 to 99.85 which refers to a neutral time to start investing in this stock. Followed by these changes, the stock seemed begin to repeat crossing with the SMA in the latest period.

3) Long-‐term :

In the long-‐term period, the stock price always stayed above the 50-‐day and 200-‐day moving average since year of 2011. This illustrates that the CVS Corporation has been experienced a steadily growing trend in the last few years.

The RSI for long-‐term condition goes for 55.56 in the range of 11.11 to 100 which is also an indicator to a decent buy.

35

Bibliography:

http://www.msn.com/en-‐us/money/stockdetails?symbol=US:CVS

http://finance.yahoo.com/q/ks?s=WBA+Key+Statistics

http://www.nasdaq.com/symbol/cvs/short-‐interest

http://data.cnbc.com/quotes/cvs

http://www.reuters.com/finance/stocks/overview?symbol=CVS

http://quotes.morningstar.com/stock/CVS/s?t=CVS&region=USA

http://investors.cvshealth.com/

http://www.fool.com/investing/general/2014/09/04/is-‐it-‐time-‐to-‐buy-‐cvs-‐caremark-‐corporation-‐stock.aspx

http://www.foxbusiness.com/markets/2014/12/31/walgreen-‐closes-‐alliance-‐boots-‐deal-‐stock-‐to-‐start-‐trading-‐under-‐new-‐ticker/

Documents

CVS Stock Report - Washington State University€¦ · 2" "!!Date:!April!9,!2015!! ! ! ! Analyst!Names:BeauBowmanandBoYang! CIFStockRecommendation!Report!(Spring2015)! Company!Name!andTicker:!CVS!Health!Corp.!