You can see below my original post on Berkshire board linked below. This is a quick take. Subsequent to my post, the stock has gently declined to $88. The 3 main thesis I put for CVS are:
They will be able to spend $10 B on buybacks
They will be able to reduce debt by $10 B
They will be able to invest $10 on the business
Buybacks So far they have done $1.5 B in buybacks in 2022 and have another $2B accelerated buyback in works. Now they are scaling their buybacks to dilution + 1% ~ 2% share count reduction, taking mid-point you can expect about 20 million share purchases. Clearly, this is a reduction from their original guidance due to Oak street health purchase. Of course they have increased the dividend by 10%. So when the share price goes down companies find a way to increase dividend, instead of buying back more shares! I am sure they have a reason for that.
Debt reduction They modestly reduced debt, but they have an ability to hit the $10 B debt reduction goal by end of 2025. We need to see.
Invest in business You can always count on corporate America on empire building. They are buying OSH for $10 B cash. At least they are not issuing shares. So, the business is going to take more than $10 B, since they will make some additional investments in the next 2 to 3 years. Most likely they may end up with $6 to $7 B share buybacks and probably around that level of debt reduction.
Separately, OSH purchase means EPS hit between now and 2025, hopefully not an hit to their cash flow. I am yet to go over the annual results. For now, bit disappointed.
The stock declined further to my last post and is clearly now below 200 DMA and in oversold condition. I use this slightly different, not a signal to buy for the bounce but the stock is in significant decline and will continue to decline. Other than the buybacks are going to meaningfully decline, nothing is new from OSH purchase. The management has been talking about strategic M&A for few quarters, so it is not like the market got blindsided.
If $80 is not holding, then hello $70. I will be selling one $80 put with an intention of taking the stock, if assigned and concurrently buying $80 put (to protect) and see if the stock can bounce back. This is mainly because I am expecting overall market to bounce back in March. The risk the stock could bounce back and my $80 put may just expire without getting assigned and I just collect $20 or $30.
My $80 puts were assigned and immediately I sold $60 Jan 2024 calls, even though my initial reaction was $70 might hold, I decided to go much deeper to give some time to see where it bottoms. If the stock starts moving sideways, I will consider closing the call and book profits on the call. Still waiting to see where it bottoms.
Selling $60 call meant the call price matched $1 to $1 stock price decline or near 1 delta. I closed the call by buying back and booking profits around $67. The stock has entered sideways movement or consolidation phase and the fundamental story is not getting bad. The price is attractive from fundamental point of view and stock stopped sliding from technical point of view. So a good time to close the call. Actually I have done this on number of other covered calls, and bought outright calls on banks, and few other names.
I could not think of any time in the last 10 years when I was fully invested like now.
CVS declined on the Medicare issue, specifically because of the star rating, which makes it eligible for bonus payments, and that is as much as $1 B, now yesterday they announced they are expecting to get above the 4 star rating. While the benefit is not immediate, but a positive news. RiteAid bankruptcy is could be another potential catalyst.
CVS had a good investor day on Dec 5th and stock steadily moved up by $10 . The key points are:
They confirm EPS guidance (mid point $8.6)
For next year 15% health care; 6% pharmacy and overall 6% growth, more importantly talked about other levers that could push this further; in other words even if somethings go negative still they could hit 6%
Also guided 6% long-term growth
$8.5 EPS for 2024; $12.5 B Cash flow, that is $1 above EPS;
More importantly, $35 to $40 b cash flow for 2024 to 2026
Now if you go back and look at my original thesis, I talked about spending $10 B to reduce debt, now, CVS instead of paying down debt talking about taking $5 to $10 B additional debt or at least debt capacity, i.e., they have clearly signaled to the market if the stock price is not going up, we will take debt and buyback.
I have sold a bunch of $60 Jan 2024 puts for $3.5, I will add to it on any price weakness; for now they are up 50% so I may bank some profits. This is a play for the next 2 to 3 years, so any weakness add.
Closed the puts, and sold $80 Jan 25 calls on the shares I owned. While I believe CVS will do good for the next couple of years, my ownership experience from 2019 makes to take profits, be opportunistic and nimble. For ex:
Starting Date
12-Mar-19
Ending Date
4/10/2024
Start Value
54.70
End Value
73.22
# of years
5.00
AGGR
6.01%
So the stock performance meh, nothing to write about. Now, if you add $10 dividends earned during the period (you pay tax on that, for now let us ignore)
Starting Date
12-Mar-19
Ending Date
4/10/2024
Start Value
54.70
End Value
83.35
# of years
5.00
AGGR
8.79%
still it is okay 8.8% CAGR. Now the covered calls and some opportunistic puts I have done pushed this return to 15%+ CAGR. There is always the risk of stock getting called away or runs further than your covered call. Also, you may do a round trip like I did with this stock
Today the entire sector took a bath, because Medicare payments increase is far less than anticipated. I am not sure how big Medicare is for CVS but will wait for some analysts and company to come out with some color on this news. That’s why it will be a 3% position and I will constantly take profits, and will have my hedges in place.
Separately, Turnarounds take much longer than we anticipate.
It’s Medicare Advantage program is big enough (and MA patients are undergoing more surgeries and other procedures costing company significant money) to miss the earnings and the stock declined by 18%
The stock has found support around $55. This is a long-term support. I haven’t had an opportunity to go through the earnings or conference call. But suffice it to say it is going to take many quarters, more than a year to get back from this.
CVS is attracting activist interest!!! The stock was trading between $55 ~ $60 Since my last post (may). Now it is breaking slightly above $60. Let us see.
Today the company announced they have replaced the CEO, Karen Lynch will step down from the post and leave the post immediately, i.e., as of Thursday. Also pre-announced the results.
