Business Strategy and Outlook Julie Utterback, CF A, Analyst, 09 August 2020 CVS aims to be the most customer -centric health company in the United States and has spent over a decade positioning itself as a leader in healthcare services, with the acquisitions of pharmacy benefit manager Caremark (2007) and insurance provider Aetna (2018) defining its strategic direction. CVS' top-tier retail pharmacy , health insurer , and PBM franchises create the potential to improve health outcomes and even bend the healthcare cost curve. If successful in these endeavors, CVS shareholders could even benefit from double-digit annualized earnings growth in the longer term after these initiatives take hold. Specifically , CVS appears uniquely positioned to improve health outcomes through its retail network of nearly 10,000 stores and its top-tier positions managing medical and pharmacy benefits. Moving a step beyond its established MinuteClinic offering, CVS aims to introduce its HealthHub concept to 1,500 stores by the end of 2021 and potentially more thereafter With care concierges, nurse practitioners, and dietitians in addition to pharmacists already on staff at these stores, CVS aims to provide a convenient way for people to check their health conditions. Currently , only about 50% of its MinuteClinic visitors have primary care physicians, and even fewer visit those doctors annually By providing a quick way to check basic health factors while the person is already at a CVS retail store, the company aims to identify gaps in care, introduce therapies, and prevent patients from needing a more intensive and likely more costly intervention at an acute hospital. With this new format, CVS' returns have the potential to improve in all of its service lines, not just the retail store. For instance, its recently acquired insurance assets should benefit if an insured patient controls a chronic condition through pharmaceuticals rather than requiring a major surgery or intensive therapy , like dialysis. Pharmaceutical volumes could rise, too, benefiting both the pharmacy and PBM assets. Society and patients could also benefit if patients remain healthier through earlier interventions, creating a lower healthcare cost burden. Important Disclosure: The conduct of Morningstar’ s analysts is governed by Code of Ethics/Code of Conduct Policy , Personal Security T rading Policy (or an equivalent of), and Investment Research Policy For information regarding conflicts of interest, please visit http://global.morningstar .com/equitydisclosures CVS Continues to Integrate its Diverse Health Services Assets Bulls Say O CVS' combination with Aetna creates the opportunity to view a patient more holistically by managing both medical and pharmacy benefits, which could lead to revenue and cost synergies for the organization. O The HealthHub concept has the potential to improve returns for all of CVS' service lines if it can help patients more easily and cost-effectively manage chronic conditions through early intervention. O CVS' ownership of the largest national PBM provides it substantial negotiating leverage and cost advantages in claims processing, allowing for best- in-class operating costs per claim. Bears Say O Healthcare reform is likely to be a recurring topic throughout the upcoming 2020 election cycle, which could constrain the stock especially if high-risk scenarios gain traction. O The bulk of insurance membership growth over the coming years will likely stem from lower -margin government-sponsored plans, creating a structural headwind to insurer profitability O Foot traffic at physical retail stores could continue to decline as consumer behavior increasingly favors online retailers. Morningstar Pillars Analyst Quantitative Economic Moat Narrow Narrow V aluation QQQQQ Undervalued Uncertainty Medium High Financial Health — Moderate Current 5-Yr A vg Sector Country Price/Quant Fair V alue 0.79 0.83 0.82 0.83 Price/Earnings 10.3 19.6 26.5 20.1 Forward P/E 9.1 — 11.3 13.9 Price/Cash Flow 5.3 10.2 18.4 13.1 Price/Free Cash Flow 6.2 13.8 27.3 19.5 T railing Dividend Y ield% 3.08 2.42 1.50 2.35 Analyst Note Julie Utterback, CF A, Analyst, 05 August 2020 Narrow-moat CVS Health turned in second-quarter operating results that beat expectations and allowed the firm to boost its 2020 outlook. After making similar changes to our expectations for 2020, our fair value estimate did not change materially W e continue to view shares as undervalued, though, recently trading at just 9 times 2020 expected earnings and offering a 3% dividend yield. CVS' second-quarter results beat expectations primarily because of lower utilization of medical services, which provided a cost benefit to the insurance operations it acquired from Aetna in 2018. In the quarter , revenue reached $65.3 billion (3% growth), above Capital IQ consensus of $64.3 billion, and adjusted earnings per share hit $2.64 (40% growth), above consensus of $1.92. Management estimates that COVID-19 positively influenced its adjusted EPS by $0.70-$0.80 in the quarter Also, a favorable tax resolution with state and local governments added about $0.10 to the company's bottom-line in the quarter , which was the primary reason CVS increased its guidance for the full year For 2020, management raised its outlook for EPS and operating cash flow slightly on the quarter's results, as it expects some offsets later in the year to recent COVID-19 benefits. For 2020, CVS now expects adjusted EPS of $7.14-7.27, up from $7.04-$7.17 previously , and operating cash flow of $11.0 billion to $11.5 billion, up from $10.5 billion-$11.0 billion previously W e have raised our outlook for 2020 in line with that new guidance. However , we have not changed our assumptions beyond that and noted that management still appears to be working toward goals laid out in previous investor events. Specifically , the company expects modest EPS growth in the next couple of years and is only working toward double-digit earnings growth by 2022. That is a standard that its insurance peers are achieving now , and we suspect CVS' shares may remain constrained until it can materially accelerate profit growth. Source: Morningstar Equity Research Source: Morningstar Undervalued Fairly V alued Overvalued Quantitative V aluation d USA CVS Morningstar Equity Analyst Report | Report as of 10 Aug 2020 01:56, UTC | Page 1 of 15 CVS Health Corp CVS (XNYS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 07 Aug 2020 21:42, UTC 07 Aug 2020 06 Mar 2019 20:45, UTC 07 Aug 2020 07 Aug 2020 07 Aug 2020 QQQQQ 64.96 USD 92.00 USD 0.71 3.08 3.08 85.01 Healthcare Plans Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? Economic Moat Julie Utterback, Analyst, 09 August 2020 CVS Health earns a narrow economic moat rating from us. As a top-tier healthcare-focused retail store, pharmacy benefit manager , and insurer , we believe CVS possesses enough scale-related cost advantages to generate economic profits for the long run. Even after the late 2018 Aetna merger , which cut into returns on invested capital, including goodwill, somewhat, we estimate that CVS’ ROICs should remain above its capital costs throughout our explicit 10-year forecast period. Our view is informed by an analysis of potential changes to the U.S. healthcare system. During the next 10 years, we view scenarios where CVS provides medical and pharmaceutical benefits through employers and even government entities, such as Medicare Advantage and Medicaid managed care plans, as much more likely than the extreme Medicare for All scenario where the private insurance industry no longer exists. In these more likely scenarios, we suspect there will be a place for private health insurers and related pharmacy benefit managers, like CVS, in the U.S. healthcare system for a relatively long period of time. In its retail operations, CVS has established significant scale that has enabled it to leverage some negotiating power with suppliers. CVS has a differentiated ability to generate significant volumes through nearly 10,000 pharmacy locations, including in T arget stores. This large store network is attractive for pharmacy benefit managers when assembling plans to obtain volume-based discounts from pharmaceutical manufacturers and also assembling convenient retail store locations that would be attractive to an insurance plan’ s members. In 2019, the firm dispensed 1.4 billion adjusted prescriptions, and its prescription share continues to climb and remains above even W algreens. While it trails W algreens’ average revenue per store, CVS’ average store revenue remains significantly higher than the pharmacy average. Scale allows CVS to leverage fixed costs (such as pharmacist salaries and rent) more effectively than subscale peers, which has contributed to the improving market share for Close Competitors Currency (Mil) Market Cap TTM Sales Operating Margin TTM/PE UnitedHealth Group Inc UNH USD 301,285 246,206 9.24 17.83 Anthem Inc ANTM USD 69,582 112,966 0.00 12.00 Cigna Corp CI USD 65,431 154,678 0.00 12.67 Humana Inc HUM USD 55,290 70,554 0.00 15.87 the likes of CVS and W algreens versus declining market share of smaller independent pharmacies and deterioration of the third largest competitor , Rite Aid. CVS’ Caremark segment provides PBM services and appears competitively advantaged in its own right with cost advantages and switching costs. The PBM industry has consolidated into three top players—CVS, UnitedHealth, and Cigna—controlling roughly 80% of U.S. prescription volumes on an adjusted basis. W e believe CVS’ leadership position in its PBM operations should help it generate excess returns over time. W e continue to view the fixed-cost leverage associated with processing about 2 billion of the nearly 6 billion adjusted prescriptions filled annually in the U.S. as a scale-related advantage. Additionally , this consolidation of purchasing power helps CVS extract discounts from drug manufacturers on one end of the transaction and pharmacies on the other end of the transaction, which helps create value for its clients such as insurance plans and employers on their pharmacy cost trends. In addition to its cost-related advantages, we see some switching costs in this business, too, with contract lengths typically around three years and annual retention rates in the high 90s for all three of the top-tier PBM players. Switching the administrative activities, partner relationships, and pharmacy benefit plan specifications to a new PBM vendor can be time-consuming and onerous, which creates inertia for clients with limited realistic alternatives, in our opinion. However , switching is possible, and the loss of specific clients could constrain the firm's growth eventually In insurance, we see two moat sources—cost advantage and network effects. An insurer’ s cost advantages relate primarily to scale, both broadly and locally CVS’ Aetna represents the fifth-largest insurer nationally , measured by premiums written, but is more likely the third or fourth largest by membership given its sizable fee-based enrollment mix. With such significant scale in the fragmented health insurance market, we believe CVS benefits from a broad cost advantage by being able to leverage its fixed centralized costs, which increases the profit potential of each marginal life covered by the organization compared with smaller peers. CVS also benefits from scale advantages in specific locations. For example, the company is positioned as either the first- or second-largest insurer in terms of premiums written in two states and the District of Columbia. While that may seem small compared with UnitedHealth (number one or Morningstar Equity Analyst Report |Page 2 of 15 CVS Health Corp CVS (XNYS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 07 Aug 2020 21:42, UTC 07 Aug 2020 06 Mar 2019 20:45, UTC 07 Aug 2020 07 Aug 2020 07 Aug 2020 QQQQQ 64.96 USD 92.00 USD 0.71 3.08 3.08 85.01 Healthcare Plans Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? two in 31 states) and Anthem (number one or two in nine states), CVS beats out top-tier competitors such as Cigna and Humana on that metric in this very fragmented industry , and we believe its influence is likely even stronger when looking at specific metropolitan areas. Local scale advantages allow for greater negotiating leverage versus service providers than smaller insurers in each community , which contributes to cost advantages. Also, when local scale advantages are significant enough, we think CVS’ insurance operations benefit from a network effect. For example, in communities where CVS already has substantial market share, it can offer lower costs or more benefits per member to existing and potential clients than its peers. If that offering is compelling enough, more employers will be attracted to CVS’ insurance plans in those communities, and local service providers, such as hospitals and physician groups, will have more incentive to join and offer lower prices to CVS’ insurance networks to gain access to its large, growing membership rolls. As CVS’ local market share rises, its negotiating leverage with providers also rises, which can create a virtuous cycle where CVS attracts even more clients and more providers to its insurance network in that area. Overall, these dynamics create barriers to entry for would-be competitors, as compiling an attractively priced provider network in a new geography would be difficult without an established membership pool. Fair V alue & Profit Drivers Julie Utterback, Analyst, 09 August 2020 Our fair value estimate for CVS remains $92 per share, which implies a 13 times multiple on 2020 expected earnings. W e expect CVS' pro forma revenue, operating profit, and adjusted earnings per share to grow about 3%, 7, and 8%, respectively , on a compound annual basis from 2019 to 2024. Investors should note that, after relatively flat earnings since 2018, CVS aims to accelerate its bottom-line growth to the low double digits by 2022 through its various cost-saving programs, lower interest expense after debt repayment, share repurchases, and synergies between its newly combined operations. Our valuation implies a similar acceleration of earnings growth during that period, including some margin expansion through 2024. Also, we expect roughly mid-single-digit earnings growth in the outer years of our 10-year forecast, including potential repurchases. In retail, we forecast low-single-digit revenue growth compounded annually during the next five years. While we expect some store count growth, most of this increase will be driven by rising revenue per store, as the new HealthHub and other new store formats add to potential growth. W e continue to expect stronger growth from the pharmacy operations versus the front of the store. However , the pharmacy operations look likely to be negatively affected by continued declines in revenue per prescription processed, as PBMs continue to exert pressure on their pharmacy networks, including CVS' stores. W e currently expect low-single-digit revenue growth from the PBM business, too, during the next five years. Specifically , we expect about 2% claims growth to be somewhat offset by pricing pressure, as new competitors could enter the fray , such as Amazon. Finally , at Aetna we expect a positive sales environment as medical and pharmacy benefits are combined. Specifically , we project 6% sales growth compounded annually , including membership growth in the low-single digits over the next five years with particular strength in government programs. W e discount all of these assumptions at a weighted average cost of capital around 7.5%. Risk & Uncertainty Julie Utterback, Analyst, 09 August 2020 CVS faces medium uncertainty , including long-term efforts to derive synergies from the Aetna acquisition and the ongoing debate around the U.S. healthcare system in the runup to the 2020 election. The Aetna merger creates integration, execution, and financial risks. Combining these two large organizations will be a multiyear process, which may not go perfectly smooth, and the synergies we anticipate between the organizations may never materialize. Additionally , CVS took on substantial debt to merge with Aetna, which creates another set of financial risks on top of its operational risks. Also, earnings growth has stalled at CVS after the merger , and we suspect shares may be constrained until the company can accelerate earnings growth to double-digit levels that are more in line with its Morningstar Equity Analyst Report |Page 3 of 15 CVS Health Corp CVS (XNYS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 07 Aug 2020 21:42, UTC 07 Aug 2020 06 Mar 2019 20:45, UTC 07 Aug 2020 07 Aug 2020 07 Aug 2020 QQQQQ 64.96 USD 92.00 USD 0.71 3.08 3.08 85.01 Healthcare Plans Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? peers. The company does not expect double-digit earnings growth until 2022. Also, healthcare policy risks may plague health insurers like CVS in both the near and long terms. The Medicare for All scenario debated in the Democratic primaries called for the elimination of the private insurance industry , which would have threatened the company's insurance operations. While we view this scenario's probability as virtually zero in this election cycle after Bernie Sanders exited the presidential contest, that policy risk may threaten the private insurance industry in future election cycles. W e see the risk of a public option as still viable in this election cycle. Health insurers could play key roles in a public option and could even benefit from the expansion of services provided, if the public option merely expands access to insurance rather than causes significant shifts in insurance sources. However , if the public option creates a scenario where a significant portion of the employer -based insurance population switches to government-sponsored plans, CVS' commercial business may suffer Stewardship Julie Utterback, Analyst, 09 August 2020 W e give CVS a Standard stewardship rating. CVS' recent acquisition history represents the most significant constraint on this score. While we think most of the company's moves made sense strategically , the prices and debt required to make them have been aggressive, in our opinion. For example, in 2018, CVS impaired $6 billion of goodwill related to the $13 billion Omnicare long-term care acquisition that was completed in 2015; that write-down represented nearly all of the goodwill related to that deal, suggesting that CVS significantly overpaid for the asset. CVS also paid about double what we thought Aetna was worth prior to the acquisition's announcement in late 2017. While we see significant potential synergies between these now combined organizations, returns on invested capital weakened after the merger , and we continue to worry that CVS paid too much, especially in light of the ongoing debate about the insurance industry in the U.S. healthcare system. Additionally , CVS has taken on such substantial financial leverage to acquire Aetna that its credit rating was cut and the company's capital allocation activities probably will be severely limited until it reaches its leverage target. For example, CVS is forgoing share repurchases (while shares appear cheap in our opinion) and only intends to maintain its dividend until it reaches its gross leverage target in the low 3s around 2022. These acquisition-related factors constrain our view of the company's stewardship. Aside from those acquisition-related concerns, we think CEO Larry Merlo has done a decent job leading CVS’ operations since 2011. A pharmacist by training, Merlo has been involved with CVS since 1990 and has been instrumental in its transition to a true healthcare-focused organization. Given the size and scope of the Aetna acquisition, though, we think the success or failure of that deal will likely define Merlo's tenure as CEO. Importantly , many key Aetna leaders have remained with the organization following the transaction, including Karen L ynch who leads the business unit. Also, we think the board has put in place a solid compensation program to align the incentives of management and shareholders. The bulk of Merlo's compensation is driven by equity and incentive-based awards with a comprehensive set of goals that we think are consistent with building intrinsic value at the firm. Annual cash bonuses are tied primarily to firmwide operating profit, along with customer satisfaction measures at both the PBM and retail segments. Performance stock units are long-term in nature and currently focused on Aetna-related synergies and relative total shareholder return. In addition, the board recently introduced performance stock units that vest over three years and are tied to EBITDA targets, and the company issues options for executive incentives, as well. Morningstar Equity Analyst Report |Page 4 of 15 CVS Health Corp CVS (XNYS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 07 Aug 2020 21:42, UTC 07 Aug 2020 06 Mar 2019 20:45, UTC 07 Aug 2020 07 Aug 2020 07 Aug 2020 QQQQQ 64.96 USD 92.00 USD 0.71 3.08 3.08 85.01 Healthcare Plans Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? Analyst Notes Archive CVS T urns in Strong Fourth Quarter , but Investments to Continue in 2020 and 2021; Shares Undervalued Julie Utterback, Analyst, 12 February 2020 Narrow-moat CVS Health turned in fourth-quarter operating results that slightly beat our expectations on the bottom line. With the company remaining on track to roughly meet expectations during its post-Aetna investment years, we expect to maintain our fair value estimate after these results, and we still view shares as undervalued. After acquiring Aetna in late 2018, we expect significant synergies and potential share repurchases (in future periods) to boost adjusted EPS growth toward the double-digits in 2022 and beyond. In the quarter , revenue reached $66.9 billion, above Capital IQ consensus of $64.0 billion, and adjusted earnings per share hit $1.73, above consensus of $1.69. By segment, the PBM business delivered strong 10% growth in claims processed to 534 million in the quarter , but adjusted operating income grew only 2% to $1.4 billion due to ongoing pricing pressure. The retail/long-term care segment grew 3% year over year to $22.6 billion in sales, but adjusted operating income declined 4% to $2.0 billion in the quarter because of ongoing reimbursement pressure. Operationally , the retail stores remained strong with 3% same-store sales growth, a 7% increase in prescription volume, an 80-basis-point increase in U.S. prescription share to 26.8%, and 1% front of store growth. Legacy Aetna performed well, too, generating nearly 4% growth in medical membership to 22.9 million on particular strength in government plans, including the fast-growing Medicare Advantage market where Aetna grew over 30%. For 2020, management highlighted guidance that looks roughly in line with our expectations after considering a dilution headwind. Specifically , the firm now expects EPS of $7.04-$7.17. Management noted that 2020 EPS would be negatively affected by about $0.08 of share-based compensation dilution because it is not repurchasing shares until it deleverages to its low-3s goal around 2022. Super T uesday Primary Results Provide Relief Rally for Health Insurance and Service Providers Julie Utterback, Analyst, 04 March 2020 Stocks in several healthcare sectors, including the health insurers and service providers, surged after Super T uesday results showed significant support behind moderate Democrat Joe Biden. W e do not expect any changes to our moats or valuations based on these results, but we now see the Democratic presidential nomination as a two-horse race between Biden and the more liberal Bernie Sanders. While delegate tallies still need to be finalized, we think it would be difficult for another candidate to win the Democratic nomination, and recent moderate momentum appears to be rallying healthcare stocks. Specifically , the difference between Biden and Sanders would be stark for the healthcare industry One of the hallmarks of Sanders' candidacy is the pursuit of a Medicare for All requirement that would eliminate the private health insurance industry W e have argued that this scenario is highly unlikely in the next 10 years, but if Medicare for All were enacted, there would be significant consequences for health insurers, dialysis companies, and other service providers in particular Biden's stance on the healthcare industry appears much more moderate and would likely build on the Obama administration's key legislative achievement, the Affordable Care Act. If Biden were the Democratic nominee, we would expect him to pursue a public option to further increase access to and affordability of health insurance in the U.S. In this scenario, we would expect the U.S. healthcare system to largely remain the same with the potential for higher insurance rolls and an increase in government-sponsored (but not necessarily government-run) programs, like Medicare Advantage. On one end of the spectrum, health insurers with a large concentration in government programs could benefit from a public option. In general though, the consolidation of moderate Democrat momentum behind Biden has acted as a catalyst for healthcare stocks that had been pressured by Sanders' Medicare for All plan. Defensive Nature of Healthcare Firms Should Offer More Protection From Coronavirus Concerns Damien Conover , Sector Director , 19 March 2020 The concerns around a global recession due to coronavirus disruptions are weighing on global markets, but the defensive nature of healthcare should hold up on a relative basis, and we don’ t expect any significant changes to our healthcare moat ratings. While we may make downward adjustments to our valuations in healthcare to account for near -term challenges, we expect more modest changes relative to recent stock price movements. Our base case Morningstar Equity Analyst Report |Page 5 of 15 CVS Health Corp CVS (XNYS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 07 Aug 2020 21:42, UTC 07 Aug 2020 06 Mar 2019 20:45, UTC 07 Aug 2020 07 Aug 2020 07 Aug 2020 QQQQQ 64.96 USD 92.00 USD 0.71 3.08 3.08 85.01 Healthcare Plans Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? calls for a strong economic rebound in 2021 following a recession in 2020, which should only have modest impacts to healthcare valuations, given the defensive nature of those companies. However , if the coronavirus pandemic exerts a sustained impact on the economy , with significantly higher numbers of patients unemployed and uninsured or underinsured, this could reduce healthcare demand to a greater extent. W e expect government efforts to reduce the near -term hit can keep most of the harder -hit industries in business while effective treatments emerge. On the near -term effects of coronavirus, we expect critically ill coronavirus patients needing essential medical services and therapies will crowd out more elective procedures, new products, and non-critical-care products. Fewer elective procedures will weigh on the device makers and service providers. Also, higher -than-expected medical costs focused on the COVID-specific cases could reduce profitability for health insurers. With branded drug firms already focused on specialty drugs, we expect less impact to this industry , but drugs administered in the hospital could still feel some crowding out by coronavirus patients. Also, clinical development timelines will probably face some delays due to coronavirus disruptions, which will likely slow some new product launches. Additionally , the coronavirus impact on the credit markets could weigh on more heavily indebted companies, such as some hospital firms and companies that have recently completed major acquisitions. In Discounted MCO Industry , New Best Idea Anthem Is Priced Below High-Impact Public Option Scenario Julie Utterback, Analyst, 08 April 2020 W e have added one of the country's largest health insurers, Anthem, to our Best Ideas list because of its attractive valuation following the COVID-19-related sell-off. Admittedly , uncertainty surrounds how this crisis will affect near -term results at Anthem and the other managed-care organizations. But we believe narrow-moat Anthem will be able to manage those risks and thrive in the long run, given its strong local scale advantages as the Blue Cross Blue Shield licensee in 14 states. Shares currently represent an enticing entry point, in our opinion, with recent trades around 65% of our $348 fair value estimate, making it a very attractive stock even in the discounted MCO industry The COVID-19 crisis has taken control of the industry's narrative and pushed Anthem's shares down to about 10 times 2020 expected earnings (reaffirmed on March 9, 2020) and a PEG ratio below 1 times. Investors appear concerned about two major risks for the MCOs related to COVID-19. First, medical costs could rise and push down profits in a severe scenario. However , we suspect the inflated COVID-19 patient costs could be offset by reduced volume in other services, such as routine care and elective procedures. Therefore, we have not changed our 2020 EPS estimates for the industry , and our estimate for Anthem remains roughly in line with management's guidance of at least $22.30. Also, even if cost trends spike, the MCOs should be able to reprice policies during the annual renewal process for 2021 and beyond. The second major risk relates to the economic downturn due to shelter -in-place orders, which is causing massive layoffs. If those layoffs are sustained, employer -based membership rolls will likely decline. However , all else being equal and including the effects of recently generated cash flows on our model, we think Anthem and the other insurers have substantial room for membership to fall in 2020 before we would change our fair values, assuming a mild recovery starting in 2021. CVS Maintains 2020 Bottom-Line Outlook Despite COVID-19 Concerns; Shares Undervalued Julie Utterback, Analyst, 06 May 2020 Narrow-moat CVS Health turned in first-quarter operating results that significantly beat expectations, due to a surge of activity in its stores and PBM related to shelter -in-place orders that began in mid-March. Joining the other four managed care organizations that we cover , CVS management has maintained its 2020 EPS guidance, suggesting the pullback in its retail stores, in particular , following initial stocking activities in March should not trip up the rest of 2020. W e are maintaining our fair value estimate for CVS and still view shares as significantly undervalued. In the quarter , revenue reached $66.8 billion (8% growth), above Capital IQ consensus of $64.1 billion, and adjusted earnings per share hit $1.91 (18% growth), above consensus of $1.63. Management estimates that COVID-19 positively influenced its adjusted EPS by $0.10 in the quarter By segment, the PBM business delivered 12% growth in claims processed to 541 million in the quarter , including about 125 basis points of benefit from Morningstar Equity Analyst Report |Page 6 of 15 CVS Health Corp CVS (XNYS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 07 Aug 2020 21:42, UTC 07 Aug 2020 06 Mar 2019 20:45, UTC 07 Aug 2020 07 Aug 2020 07 Aug 2020 QQQQQ 64.96 USD 92.00 USD 0.71 3.08 3.08 85.01 Healthcare Plans Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. 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T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? COVID-19, and adjusted operating income grew 25% to $1.2 billion. The retail/long-term care