CVS Health: Hidden Value?

| About: CVS Health (CVS)
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CVS reported mixed Q4 results.

The retail pharmacy slightly lowered 2017 estimates that include substantial cash flow reductions from last year.

The company offers a solid capital returns program, but not necessarily enough to signal huge value in the stock.

CVS Health (NYSE:CVS) hit our radar a few months back as the stock plunged while discussing significant share buybacks. The combination can typically signal some hidden value in a stock.

The stock traded back towards the lows prior to releasing Q4 results. Close to levels not seen in several years, is CVS worth owning now?

CVS reported mixed Q4 results with the third straight quarter of beating EPS estimates while missing revenue expectations. The healthcare company previously lowered EPS guidance so the beat wasn't that significant as the trend remains under pressure.

The company guided to 2017 EPS of $5.77 to $5.93 lowering the high-end target from $5.97. So the slightly adjusted down guidance places CVS Health on pace to only match the 2016 EPS totals.

The stock shows signs of hidden value due to the large capital return plans. At the same time, the amount of share buybacks are possibly masking a bigger concern.

CVS makes the point that full-year guidance assumes the completion of $5.0 billion in share repurchases. At the current market value of around $82 billion, the company will reduce the share count by roughly 6% during the year.

The problem here is that CVS has reduced the share count during 2016 as well so the buybacks are masking a major decline in operating income expectations. The average share count for 2015 was 1,126 million and down to 1,079 in 2016.

Most notably, digging into the cash flow metrics and CVS expects large declines of up to $2 billion annually in the 2017 numbers. At the same time, the pharmacy benefits company has a debt laden balance sheet with net debt around $24 billion.

For the net payout yields concept (net stock buyback yield plus dividend yield) to really work, a company needs an attractive stock combined with strong cash flows and a favorable balance sheet full of excess cash. CVS is working at near maximum capital returns to only generate a yield of roughly 8%.

CVS Net Common Payout Yield (<a href=

CVS Net Common Payout Yield (TTM) data by YCharts

The 8% yield is solid, but the top yielding stocks in the market typically top 10% yields. CVS provides a solid NPY option for anybody looking for healthcare diversification, but the stock doesn't necessarily signal a hidden value at this level.

The key investor takeaway is that CVS is reasonably priced for an investment. The stock trades at roughly 13.5x the analyst expectations for 2017, but a hidden value needs a cheaper P/E multiple and the ability and willingness to spend substantially more on stock buybacks to signal the cheap value.

The stock has a potential catalyst with the possibility of a big tax cut from the 39% effective rate, but the numbers don't signal an overwhelming hidden value.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.