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Growing Competitive Pressures, Leverage Drive Our Reduced Fair Value Estimate of CVS Health (Walgreens, Too)

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By Callum Turcan On November 9, we reduced our fair value estimate of CVS Health Corporation (CVS) (which operates pharmacies, walk-in medical clinics, retail centers, and a large health insurance business). Our new fair value estimate is $55 per share, down from $73 per share previously. CVS Health’s 52-week share price range has been $52-$77, and the company yields 2.7% at the time of this writing. We recently wrote an article here explaining some of the major broad-based drivers behind why fair value estimates can, do, and should change over time as future expectations change. From our perspective, CVS Health’s near- and medium-term outlook has become increasingly stressed. Though investors have bid up shares of CVS in the wake of … Read more

Coronavirus Crisis Deepens, Italy on Lockdown

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Image: WHO. The epidemic curve of confirmed COVID-19 cases that have been reported outside of China is steepening. Italy remains a hotspot. By Brian Nelson, CFA The “Coronavirus Crisis” is worsening. According to the latest situation report from the World Health Organization (47), dated March 7, Italy (EWI) reported an increase of 778 new cases and 49 deaths as a result of COVID-19, increases of 20.2% and 24.9%, respectively, from the day prior. Total cases in Italy are now over 4,600 and total deaths now nearly 200, but these numbers are sure to rise in the coming days, if they have not already (the latest unofficial tally in Italy suggests new infections have risen to 5,883). The terrible news prompted … Read more

When We Get It “Wrong” — How To Think About Our Methodology In Action

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When We Get It “Wrong” — How To Think About Our Methodology In Action Image: Chipotle (CMG) was one of our best calls in 2019.   Image: Verint (VRNT) was a controversial idea in the Best Ideas Newsletter portfolio that worked out great for members this year.   Image: Visa (V) has been the top-weighted idea in the Best Ideas Newsletter for as long as we can remember. In December 2017, when we migrated to weighting ranges for ideas in the newsletter portfolio, the company’s “weight” was 8.6%. The image above shows its performance relative to the S&P 500 (SPY) since then. Source (pdf). — Let’s talk about the newsletter portfolios, some areas where we’ve made mistakes, and how some members use our services. … Read more

Cardinal Health Battling Bottom-Line Headwinds

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Image Source: Global Panorama Healthcare product distributor and Dividend Aristocrat Cardinal Health has had its share price performance in 2018 dampened by a number of factors, including generic drug price deflation weighing on its ‘Pharmaceutical’ segment, struggles in its ‘Medical’ segment, and the potential for disruption within its industry. By Kris Rosemann The drug distribution industry is attractive as a result of the group’s predictable revenue streams and the strong competitive positions of a number of participants, which result from the barriers to entry that are difficult-to-replicate distribution networks, myriad regulatory compliance issues, and industry relationships. The industry currently operates as an oligopoly with McKesson (MCK), Cardinal Health (CAH), and AmerisourceBergen (ABC) collectively controlling more than 90% of the market. … Read more

HCA Healthcare – Building Out a Healthcare Network

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Image Source: HCA Q2 2018 Investor Update We are becoming increasingly intrigued by the consolidation occurring in the hospital sector as HCA Healthcare is well on its way to developing a dominant position in some of the more populated states in the US. By Alexander J. Poulos Key Takeaways The pace with which HCA Healthcare has built out its network of care centers is impressive, and it now holds impressive share in notable markets across the US. By utilizing the low interest rate environment, HCA has methodically expanded its care network. We like the economies of scale and pricing power that come with its large network, but its balance sheet health has paid the price. HCA is working to reward … Read more

Amazon: The Destroyer of Other Companies’ Profits

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Image Source: Victor Amazon is stepping into the pharmacy business with the purchase of online pharmacy start-up PillPack. The market is implying the move will prove to be more than just a headache for those operating in the drug store/pharmacy and drug-distributor complex. Whether the impact will be significantly material in the coming years remains to be seen, but it’s a big directional negative for impacted parties. By Brian Nelson, CFA We saw the writing on the wall. We had once included CVS Health (CVS) in the simulated Dividend Growth Newsletter portfolio and the simulated Best Ideas Newsletter portfolio, but we ditched the company in February. We couldn’t envision a scenario at the time where things would be getting better … Read more

CVS Health Story Unchanged; Still Okay with Its Removal

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Image Source: Mike Mozart CVS Health continues to face long-term threats to its business, and relatively weak near-term performance expectations have done little to inspire confidence. The company’s long-term debt load has exploded as it prepares to acquire Aetna, and we don’t expect the company to bounce back onto our radar given the materially increased financial leverage amidst other challenges. By Kris Rosemann Shares of former simulated newsletter portfolios idea CVS Health (CVS) continue to face pressure, and its first quarter 2018 report, released May 2, offered little support. Our opinion of the risks facing the company are unchanged, as threats such as Amazon (AMZN) teaming up with Berkshire Hathaway (BRK.A, BRK.B) and JP Morgan (JPM) to form a new healthcare company … Read more

Walgreens Boots Alliance Remains at the Crossroads of a Rapidly-Evolving Healthcare Landscape

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Image Source: Walgreens 2Q 2018 Earnings Release By Alexander J. Poulos The evolving healthcare landscape has been dealing with the threat of a disruptive new competitor entering the market and considerable political risk. Though the need for healthcare remains impervious to economic forces, a clear deflationary trend has descended on the industry that has affected many of the well-entrenched participants. Let’s examine Walgreens Boots Alliance for clues that a shift in sentiment may have occurred in this well known, yet beleaguered sector. We’re watching Walgreen’s equity very closely. The Consolidation Trend Continues One of the often overlooked, but in our view, key dynamics affecting the drug distributers/retailers such as Walgreens Boots Alliance (WBA) is the continued deflationary trends exhibited in … Read more

Cigna, Express, and the Unwinding of the PBM Market

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Given its track record of creative destruction, when Amazon plans to enter a particular line of business, it presents an ominous threat to incumbents. What is often overlooked, too, is that Amazon is more than willing to try new verticals—if they prove promising, additional assets will be devoted to the new line of business, often with fawning media coverage. If Amazon is unsuccessful in its endeavor, however, then it seems as though it will “fail fast” and shut down the project and move on. We found the recent announcement of a joint venture to tackle the healthcare industry as particularly noteworthy. By Alexander J. Poulos Amazon as the Great Disrupter We have marveled at Amazon’s (AMZN) rumored ambition into pharmaceutical … Read more

Rising Risk Free Rates Threatening Market, Removing CVS and Hanesbrands

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The most important variable to keep your eye on, the 10-year Treasury, is rising, and the long-term implications on equity values could be considerable. We don’t think the moves thus far have been too disruptive, but continued concerns over US tax receipts and infrastructure/defense spending could send sovereign yields roaring higher. As fourth-quarter earnings season marches on, let’s take a look at some meaningful recent quarterly reports. We’re also shedding two companies from the simulated newsletter portfolios. By Kris Rosemann and Brian Nelson, CFA The market continues to be on edge as it considers what the borrowing cost of US debt might be in the event of the next downturn, the timing the only uncertainty, now that it has significantly … Read more