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Investment idea - CVS Health
11 february 2015

CVS Health (CVS), one of the largest integrated pharmaceutical companies in the US, recently published a strong report for Q4 2014. Revenue increased by 12.9% y-o-y, outpacing expectations by 2.8%. The drugstore segment became the growth locomotive (+21% y-o-y) due to the acquisition of Coram and expansion of drugstore chain. Adjusted EPS rose 8.0% y-o-y, outstripping expectations by 0.5%. The company expanded its trade network by 46 stores (+0.6% q/q) to 7,981 stores.

In line with guidance, the company will continue to improve its financial performance in 2015. Adjusted EPS is expected to grow 16% y-o-y to USD 5.05-5.19. The company plans to generate free cash flow worth USD 5.9-6.2 bn and allocate a part of it to M&A deals. The company also expects to spend USD 6 bn to buy back its own shares this year as part of an updated buyback program worth USD 10 bn (USD 12.7 bn, taking into account the previous program).

Furthermore, CVS decided to raise its quarterly dividend by 27% to USD 0.35 per share, implying a 1.5% dividend yield. The company confirmed plans to increase the dividend payout ratio to 35% by 2018.

We are upbeat about the future prospects of CVS. Given CVS’ strong integrated business model, which has no competitors, we believe that the company could benefit from the trend of rapid growth in the number of Americans enrolled in various health insurance programs, as well as from rising health care costs of US citizens.

We raised the target price of CVS shares to USD 112 and reiterate a Buy recommendation in the mid-term. The short-term technical target is USD 105.

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Investment idea - CVS Health

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