Is It Time to Buy CVS Caremark Corporation Stock?

Buy CVS Health's stock on the decision to dump tobacco products sooner than expected? Why it could be a smart move.

Sep 4, 2014 at 10:29AM

Where there's smoke, there's fire. But what about where there's no smoke?

The company formerly known as CVS Caremark announced two big changes this week. First, its name changed to CVS Health Corporation (NYSE:CVS). Second, the giant pharmacy benefits manager and retailer removed all tobacco products from its stores effective Sept. 3 -- almost one month earlier than originally scheduled. With no more smoke, could CVS Health's shares actually catch fire?

Cvs Pharmacy

Source: FoolEditorial on Flickr 

Cold turkey

On the surface, discontinuation of selling tobacco-related products seems like a bad business move. When CVS first announced the decision in February, the company acknowledged that it stands to lose around $2 billion in annual revenue by removing cigarettes and tobacco from its stores.

That anticipated loss doesn't stem solely from tobacco-related purchases. Shoppers who used to go to CVS stores to buy cigarettes tobacco also sometimes bought other products. With CVS no longer stocking the tobacco products, those customers could take their business elsewhere.

No one can argue that $2 billion is a trivial sum, either. Earlier this year, CVS stated that booting tobacco products would shave $0.06 to $0.09 per share from its 2014 earnings. With the expedited implementation of the no-tobacco policy, it stands to reason that the negative impact could be on the higher end of that range.

A healthy decision
Despite the potential financial concerns, the market has shrugged off CVS' tobacco decision. Since the initial announcement in February, shares are up 22%. CVS Health's stock moved up nearly 1% after the company stated that tobacco products would be removed from stores earlier than previously scheduled.

Cvs Health Logo

Source: CVS Health

This positive movement likely stems from a couple of factors. First, CVS hinted in February that it "has identified incremental opportunities that are expected to offset the profitability impact". One of those "incremental opportunities" could be related to the company's major initiative to promote smoking cessation. Of course, products to help cigarette smokers kick the habit are available at CVS stores nationwide.

The second potential reason for overall market optimism could be that the long-term impact of CVS' repositioning might be more beneficial than some think. Employers, insurers, and accountable care organizations, or ACOs, are all looking for ways to promote good health as a way to control healthcare spending.

These same entities also partner with pharmacy benefits management companies to control prescription drug spending. CVS Health's PBM business segment generates more revenue than the retail pharmacy business segment. Expect the company to make a concerted effort to leverage its corporate commitment to healthy living into new business opportunities.

Fiery call
Is the time right to buy CVS Health stock? I think it could be -- despite the sizzling run so far this year and despite the financial impact of the company's tobacco decision.

My view is based on macro trends and valuation. Health reform and an aging U.S. population both provide wind for the sails of PBMs and pharmacy retailers. CVS Health ranks as the second-largest player in both categories and stands to benefit from these macro factors. I suspect that CVS' projected image as a "pharmacy innovation company" will help.

As for valuation, it's true that CVS Health's stock is at the most expensive point in the past five years. However, its trailing price-to-earnings multiple still hasn't climbed back to pre-recession levels. The stock has plenty of room to run before it hits peak valuation marks. CVS Health might not deliver the awe-inspiring returns experienced over the past two years, but this stock should still be able to warm up investors' portfolios.

Leaked: This coming blockbuster could make even CVS jealous
The best investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not just how we treat a common chronic illness, but potentially the entire health industry. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multi-bagger returns you will need The Motley Fool's new free report on the dream-team responsible for this game-changing blockbuster. CLICK HERE NOW.

Keith Speights has no position in any stocks mentioned. The Motley Fool recommends CVS Health. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information