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CVS Stock Is Not Nearly as Cheap as You Might Think

Tom Taulli

CVS (NYSE:CVS) garnered some catching headlines recently that have the potential to move CVS stock. The company announced it would sell CBD (cannabidiol) products in some of its locations.

CVS Stock

Source: Mike Mozart via Flickr

Yes, CBD has been red hot, helping to drive the valuations of cannabis operators like Cronos Group (NASDAQ:CRON), Canopy Growth (NYSE:CGC) and Aurora Cannabis (NYSE:ACB). It is a compound found in hemp that does not have TCH, which is the chemical that produces a high. Last year, Congress took CBD off the list for illegal substances by passing the Farm bill.

While CBD offerings such as creams and sprays for the relief of pain will likely gin up some sales for CVS, it probably won’t do too much to move the needle for the stock price. The fact is that the overall business is just too massive.

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OK then, regardless of the CBD opportunity, might CVS still be an opportunity here? Well, from a valuation standpoint, the shares are definitely at dirt-cheap levels. Consider that the forward price-to-earnings multiple is a mere 7.4X. Oh, and the dividend is at an attractive 3.57.

It’s also important to note that CVS continues to crank out substantial cash flows. For last year, they came to $8.9 billion. And the company forecasts that they will increase from $9.8 billion to $10.3 billion this year. A big part of this will be due to the cost synergies from the acquisition of Aetna.

The Issues with CVS Stock

Yet when it comes to CVS, the low valuation and strong cash flows may not be enough. After all, the healthcare industry is rapidly undergoing wrenching changes. The latest evidence of this: Centene’s (NYSE:CNC) $15 billion proposed acquisition for WellCare Health Plans (NYSE:WCG).

The deal will create a powerhouse in the lucrative market for Medicare and Medicaid plans (there will be 22 million members and $97 billion in revenues). This will also put even more pressure on CVS, whose stock fell on the news.

But there other headwinds that the company must deal with. For example, there remain major forces to lower pharmacy reimbursements and rebates.

Here’s how CEO Larry Merlo put it in the earnings call: “What we’re experiencing in ’19 is the declining benefit from new generics, lower brand inflation and the ongoing questions around rebates, along with some structural and CVS-specific challenges in the long-term care space.”

In fact, he believes that 2019 will be a year of “transition.”

But there is something else — which could be a wildcard for CVS stock. It’s what Amazon.com (NASDAQ:AMZN) might do. Last year, the company agreed to purchase PillPack, which is a next-generation online pharmacy. And because of this, the buzz is that AMZN is planning to make a major play for the drug distribution business. If so, this would likely have an adverse impact on CVS stock. Let’s face it, investors have seen too many examples of how AMZN has disrupted industries.

Bottom Line on CVS Stock

For the most part, CVS’s $69 billion acquisition of Aetna was a smart move. The vision of creating a fully integrated healthcare platform will likely provide for sustainable competitive advantages. The company is also taking innovative approaches of providing healthcare, such as with MinuteClinic locations and home visits for infusion services

But in the meantime, there are few material catalysts to get CVS stock back into gear. And again, there is the uncertainty regarding AMZN.

So for now, the shares are probably not worth a purchase right now.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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