Investors will almost never have as good a pulse on the future prospects of a company as insiders will. There’s naturally an information asymmetry that comes along with weekly meetings, and proximity to management.
The water cooler chatter is a real phenomenon that acts as a communication channel spreading information around a company. Astute insiders get a really good sense of whether a company will thrive or suffer in the near-term. That’s why it’s so important to pay attention to what insiders are buying and selling.
But insider transactions aren’t the only way to discern what the prospects for a company may be. The options market offers a lens into where a share price will be based on how heavily calls or puts are snapped up. If a “weird” options purchase is made, for example a massive number of put options are bought close to a big event, the odds are someone “in-the-know” is betting heavily on bad news coming out.
It works both ways. When calls are scooped up en masse, some good news may be around the corner. And that’s what happened recently with CVS. On March 3, 10,000 calls were bought on CVS, a real anomaly. What might have triggered the buy?
- CVS has a diverse revenue stream stemming from retail pharmacy, pharmacy benefits management, and healthcare services.
- The company has a strong financial outlook, generating significant cash flow and has a solid balance sheet, allowing it to invest in growth, return capital to shareholders, and weather economic downturns.
- Analysts have a consensus target of $114 per share, implying over 53% upside if realized.
- The company pays an annual dividend yield of 3.25%.
The Bull Case for CVS
Looking under the hood, it’s clear why CVS could be a highly attractive play.
Healthcare spending in the United States is projected to continue to grow as the population ages, chronic diseases become more prevalent, and new treatments and technologies become available. As one of the largest retail pharmacy chains in the country, CVS is well-positioned to benefit from this trend.
Management has been astute in building diverse revenue streams thanks to a combination of its retail pharmacy business, pharmacy benefits management (PBM) business and its growing healthcare services business.
And CVS has developed a strong brand and customer loyalty that isn’t easily disrupted. It has a reputation for providing high-quality healthcare products and services. Plus, it’s investing heavily in a digital and mobile technology, which has helped to enhance the customer experience and drive growth.
Is CVS a Buy?
Where CVS shines brightest however is its financial outlook. The company generates significant cash flow and has a rock solid balance sheet, which allows it to invest in growth, return capital to shareholders, and weather economic downturns.
When we examined the numbers in more depth, the bull case became ever more clear. CVS has upside to $116 per share using a discounted cash flow forecast analysis. That would imply as much as 42.9% upside from current levels. And while waiting for the share price to reflect fair value, shareholders are compensated with an annual 3.25% dividend yield.
Analysts seem to agree with our outlook. Twenty one analysts have a consensus target of $114 per share which translates to over 53% upside if realized.
Another factor that should give investors comfort owning CVS shares is that every single year over the past decade the company has grown revenues. That suggests that regardless of economic boom and bust cycles, CVS will prosper. Further supporting the bull thesis, over the last 10 years EBIT has almost doubled from $7.9 billlion to $15.4 billion.
On a relative value basis, the takeaway is clear. CVS has a lot of upside and its price declines since December 2022 appear to be overblown and an opportunity to acquire shares on sale.