Summary
- As a dominant player along the pharmacy value chain, CVS has proven to be a resilient EVA generator through thick and thin.
- The company is making good progress in integrating Aetna, meaning that shareholder distributions have ample room to grow in the future.
- We believe CVS is deeply undervalued, providing one of the most compelling total return potentials in this market environment.
Introduction
Adjacent to our initial coverage of CVS Health (CVS), we decided to readdress the company with a pronounced focus on valuation, relying on the EVA (Economic Value Added) framework. In pursuit of maximizing total returns, two segments of the stock universe are of exceptional importance, which we simply refer to as “EVA Monsters” and “Fallen Angels”, as illustrated below.
The fundamental return of every stock (excluding the effect of valuation) is composed of:
Fundamental Return = EVA CAGR + dividend yield + share count reduction
In the case of the aforementioned two categories, the composition of fundamental return is very different:
