Investors sold off shares of CVS Health Corporation (NYSE:CVS) when the company issued soft guidance following its fourth-quarter report. It is easy to say the weakness ahead is expected because integrating Aetna also raised its debt.
CVS is clearly a long-term holding stock whose valuations are compelling. Though the stock may close at new lows in the week ahead, timing an entry point may pay off.
CVS issued a light forecast that implies it will not issue a dividend increase this year. Instead, it will invest in merging Aetna, leading to $750 million in cost synergies by 2020 and will pay down its debt. In 2018, CVS applied its ~$7 billion free cash flow to $2 billion worth of share buybacks.
Investors punished CVS for its cautious outlook on rebates, ongoing pharmacy reimbursement pressures, pressure from generics, and lower brand inflation.
CVS has a plan to tackle these challenges. For one thing, it will have a Guaranteed Net Cost PBM contracting model which lowers costs for clients and members. It will improve the customer experience and apply multiple levers of value creation.
Markets fretted over unchanged dividend rates and a suspension in stock buyback. Paying down for the Aetna acquisition, though, will grow free cash flow. With over $10 billion due in 2021, CVS must grow revenue. EPS of $6.68 - $6.88 implies a forward P/E of as low as nine times.
