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CVS Health: Patience – CVS Health Corporation (NYSE: CVS)

surprisingly, CVS Health (CVS) has lost 50% of its value since it traded more than $ 110 in 2015. The pharmacy company has just completed a major merger with Aetna, which is fueled by debt, and shares are recording a new multi – year low. The massive debt burden and chaotic business model provides opportunities for collapsed stocks.

CVS Health LogoImage Source: CVS Health website

It is difficult to manage.

CVS Health can promote an integrated health solution that integrates Aetna's health benefits business, but it can not change a large business with an annual turnover of $ 250 billion. The new business includes huge retail operations involving 10,000 pharmacies, Caremark pharmacy benefit managers, and Aetna's Health Benefits Manager.

As the burden of substantial debt increases, there is little room for error in complex businesses, especially the government is expanding its efforts to reduce drug pricing. The company is in a unique position to handle healthcare savings opportunities, but CVS Health does not necessarily benefit from that scenario because some of the brokers want to provide savings to the industry.

Source: CVS Health Q4 & # 39; 18 Presentation

So on the one hand, the company sounds like a leader in the future of healthcare and improves health outcomes at lower cost. CEO Larry Merlo

CVS Health is in the best position to lead the necessary changes to the disrupted US Healthcare System through strong integrated healthcare services, excellent community assets, proven pharmacy management leadership and commitment to working with healthcare providers to get the best results There is. To the patients and clients we serve

On the other hand, the company has not had any advantage because many people want to see CVS Health's operating income of $ 15 billion redistributed to other people in the health care system, including the cost savings of patients. As such, the company presented the reasons for the EPS hitting in 2019 as follows.

  • Reduced benefits of generics.
  • Low brand drug inflation.
  • Ongoing questions about drug rebates.
  • CVS related issues in long – term care facilities.

The end result is that the former CVS unit predicts a decrease in operating profit. The retail business is projected to decline 10% to approximately $ 655 million, and the pharmacy services group expects the low single digit figure to drop to approximately $ 4.48 billion.

The end result is a large-scale merger in which Aetna is purchased to hide the weaknesses of the legacy business, or CVS Health does not focus on the business during the merger and the expected results are not seen.

Keep it simple.

Where the stock is interesting is the company keeping the game plan simple. CVS Health has dramatically expanded its debt levels over the past few years, with net debt now reaching nearly $ 67 billion and annual interest expenses exceeding $ 3 billion.

chartYCharts data

The company predicted an operating profit of around $ 15 billion in 2019, so the debt level was not a leverage issue, it was a strategic nightmare for a company that could not achieve its financial goals in a vast business.

Simply CVS Health must pay off the debt and prove that the model is a win-win strategy to provide more primary care services at retail through MinuteClinic. The biggest concern based on these early results is that the major customers using these services are customers looking for good deals that are cost-effective. There is a big difference between a company that provides the healthcare solution that the patient wants and a company that provides the lucrative services that these patients need.

The company predicts a free cash flow of 2019 in the range of $ 7.5 billion with extra cash after paying annual dividend of $ 2 billion to pay off the debt. Although CVS Health has a short term debt maturity that is not a major concern for the cash flow business, the company still needs to eliminate the risk by repaying debt and other maturities.

Source: CVS Health Q4 & # 39; 18 Presentation

The unknown part is where the EPS strikes the bottom. Until the management team can handle large businesses, the trend remains very negative.

chartYCharts data


A key investor keeper is that CVS Health is trading at a definite value of $ 6.78 at 8.3x EPS expectations. The company must demonstrate that it is able to actually manage difficult-to-manage businesses while repaying its actual debt levels.

You need more patience before engaging in this potential value trap. Once the negative EPS trend reverses, the share price will be the number of shares.

expose: I / We have no status on the shares mentioned and are not scheduled to open in the next 72 hours. I wrote this article myself. And it expresses my own opinion. I do not receive compensation (except Alpha Seeking). I do not have a business relationship with the company whose shares are mentioned in this article.

Additional disclosure: Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as an invitation to sell securities. Before trading stocks, you should do your own research and reach their conclusions or consult with your financial advisor. Investments include risks including loss of principal.

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