Today CVS Caremark (CVS) changed its corporate name to CVS Health. It also executed its plan to stop selling cigarettes in the stores. CVS is trying to be a company that cares about your health, and its easier to get drug deals for Caremark when you don’t sell cigarettes in CVS stores.
I really blew it on CVS back in late 2012. Back then I had a list of quality Blue Chip stocks that were undervalued. I liked CVS because of its history of growing profits each year, at a low-teens rate. The stock also paid a dividend. Alas I didn’t buy it.
In 2012 Q4 CVS was $49. It had a P/E of 12, with profit growth of 25% and 21% the prior two qtrs, with 24% and 20% growth expected the next two. But the Est. LTG was 6%. even though CVS had grown profits 14% a year the past decade. I thought the stock was worth 14x earnings, and would be $61 by 2014 — providing a 27% total return in one-to-two years.
So now that CVS is in the news, let’s take a look at the stock as of this quarter:
One Year Chart
This qtr (data as of August 22) CVS is $79 with a P/E of 18. Notice the P/E is in red, back in late 2012 the stock was undervalued, now I think it’s overvalued.
The company is also forecasting slower profit growth, which we were well aware of as cutting tobacco sales will put a dent into short-term profits. But we knew this months ago.
Fair Value
With an estimated long-term profit growth rate of 14% and a 1.5% yield, I feel CVS is fairly valued at 16 times earnings. The stocks a little high right now. With a slower profit growth period coming I didn’t reward CVS with a higher P/E as I normally should have. If the company is expected to deliver a total return of 15.5% and grows every year even through recessions, it should really have a P/E higehr than the growth rate, say 17 or so.
Sharek’s Take
CVS Health is a very dependable stock. If I managed a conservative stock portfolio this would be in it. I love it as a buy-and-hold investment for retirees. But right now the stock’s fairly valued, and I like to buy slow-growers when they are undervlaued. CVS’s already gone in a run higher and I wouldn’t buy it unless it corrected.
View the Earnings Table here. View the Profit History here.View the Ten Year Chart here.
