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 Value Estimate Price/Fair Value Trailing Dividend Yield % Forward Dividend Yield % Market Cap (Bil) Industry Stewardship QQQQQ 64.96 USD 92.00 USD 0.71 3.08 3.08 85.01 Healthcare Plans Standard 07 Aug 2020 07 Aug 2020 06 Mar 2019 07 Aug 2020 07 Aug 2020 07 Aug 2020 21:42, UTC 20:45, UTC Morningstar Pillars Analyst Quantitative Important Disclosure: Economic Moat Narrow Narrow The conduct of Morningstar’s analysts is governed by Code of Ethics/Code of Conduct Policy, Personal Security Trading Policy (or an equivalent of), Valuation QQQQQ Undervalued and Investment Research Policy. For information regarding conflicts of interest, please visit http://global.morningstar.com/equitydisclosures Uncertainty Medium High Financial Health — Moderate CVS Continues to Integrate its Diverse Health Services Assets Source: Morningstar Equity Research Quantitative Valuation CVS Business Strategy and Outlook dUSA Julie Utterback, CFA, Analyst, 09 August 2020 Analyst Note Undervalued Fairly Valued Overvalued CVS aims to be the most customer-centric health company Julie Utterback, CFA, Analyst, 05 August 2020 in the United States and has spent over a decade Narrow-moat CVS Health turned in second-quarter Current 5-Yr Avg Sector Country Price/Quant Fair Value 0.79 0.83 0.82 0.83 positioning itself as a leader in healthcare services, with operating results that beat expectations and allowed the Price/Earnings 10.3 19.6 26.5 20.1 the acquisitions of pharmacy benefit manager Caremark firm to boost its 2020 outlook. After making similar Forward P/E 9.1 — 11.3 13.9 (2007) and insurance provider Aetna (2018) defining its changes to our expectations for 2020, our fair value Price/Cash Flow 5.3 10.2 18.4 13.1 strategic direction. CVS' top-tier retail pharmacy, health estimate did not change materially. We continue to view Price/Free Cash Flow 6.2 13.8 27.3 19.5 Trailing Dividend Yield% 3.08 2.42 1.50 2.35 insurer, and PBM franchises create the potential to shares as undervalued, though, recently trading at just 9 Source: Morningstar improve health outcomes and even bend the healthcare times 2020 expected earnings and offering a 3% dividend cost curve. If successful in these endeavors, CVS yield. Bulls Say shareholders could even benefit from double-digit OCVS' combination with Aetna creates the annualized earnings growth in the longer term after these CVS' second-quarter results beat expectations primarily opportunity to view a patient more holistically by initiatives take hold. because of lower utilization of medical services, which managing both medical and pharmacy benefits, provided a cost benefit to the insurance operations it which could lead to revenue and cost synergies for Specifically, CVS appears uniquely positioned to improve acquired from Aetna in 2018. In the quarter, revenue the organization. health outcomes through its retail network of nearly reached $65.3 billion (3% growth), above Capital IQ OThe HealthHub concept has the potential to 10,000 stores and its top-tier positions managing medical consensus of $64.3 billion, and adjusted earnings per improve returns for all of CVS' service lines if it can and pharmacy benefits. Moving a step beyond its share hit $2.64 (40% growth), above consensus of $1.92. help patients more easily and cost-effectively established MinuteClinic offering, CVS aims to introduce Management estimates that COVID-19 positively manage chronic conditions through early intervention. its HealthHub concept to 1,500 stores by the end of 2021 influenced its adjusted EPS by $0.70-$0.80 in the quarter. OCVS' ownership of the largest national PBM and potentially more thereafter. With care concierges, Also, a favorable tax resolution with state and local provides it substantial negotiating leverage and cost nurse practitioners, and dietitians in addition to governments added about $0.10 to the company's advantages in claims processing, allowing for best- pharmacists already on staff at these stores, CVS aims to bottom-line in the quarter, which was the primary reason in-class operating costs per claim. provide a convenient way for people to check their health CVS increased its guidance for the full year. conditions. Currently, only about 50% of its MinuteClinic visitors have primary care physicians, and even fewer visit For 2020, management raised its outlook for EPS and Bears Say those doctors annually. By providing a quick way to check operating cash flow slightly on the quarter's results, as it OHealthcare reform is likely to be a recurring topic basic health factors while the person is already at a CVS expects some offsets later in the year to recent COVID-19 throughout the upcoming 2020 election cycle, which retail store, the company aims to identify gaps in care, benefits. For 2020, CVS now expects adjusted EPS of could constrain the stock especially if high-risk introduce therapies, and prevent patients from needing a $7.14-7.27, up from $7.04-$7.17 previously, and operating scenarios gain traction. more intensive and likely more costly intervention at an cash flow of $11.0 billion to $11.5 billion, up from $10.5 OThe bulk of insurance membership growth over the acute hospital. billion-$11.0 billion previously. We have raised our outlook coming years will likely stem from lower-margin for 2020 in line with that new guidance. However, we have government-sponsored plans, creating a structural With this new format, CVS' returns have the potential to not changed our assumptions beyond that and noted that headwind to insurer profitability. improve in all of its service lines, not just the retail store. management still appears to be working toward goals laid OFoot traffic at physical retail stores could continue For instance, its recently acquired insurance assets should out in previous investor events. Specifically, the company to decline as consumer behavior increasingly favors benefit if an insured patient controls a chronic condition expects modest EPS growth in the next couple of years online retailers. through pharmaceuticals rather than requiring a major and is only working toward double-digit earnings growth surgery or intensive therapy, like dialysis. Pharmaceutical by 2022. That is a standard that its insurance peers are volumes could rise, too, benefiting both the pharmacy and achieving now, and we suspect CVS' shares may remain PBM assets. Society and patients could also benefit if constrained until it can materially accelerate profit patients remain healthier through earlier interventions, growth. creating a lower healthcare cost burden. ? © 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. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. Morningstar Equity Analyst Report |Page 2 of 15 CVS Health Corp CVS (XNYS) Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Trailing Dividend Yield % Forward Dividend Yield % Market Cap (Bil) Industry Stewardship QQQQQ 64.96 USD 92.00 USD 0.71 3.08 3.08 85.01 Healthcare Plans Standard 07 Aug 2020 07 Aug 2020 06 Mar 2019 07 Aug 2020 07 Aug 2020 07 Aug 2020 21:42, UTC 20:45, UTC Close Competitors Currency (Mil) Market Cap TTM Sales Operating Margin TTM/PE the likes of CVS and Walgreens versus declining market UnitedHealth Group Inc UNH USD 301,285 246,206 9.24 17.83 share of smaller independent pharmacies and deterioration of the third largest competitor, Rite Aid. Anthem Inc ANTM USD 69,582 112,966 0.00 12.00 Cigna Corp CI USD 65,431 154,678 0.00 12.67 CVS’ Caremark segment provides PBM services and Humana Inc HUM USD 55,290 70,554 0.00 15.87 appears competitively advantaged in its own right with Economic Moat cost advantages and switching costs. The PBM industry Julie Utterback, Analyst, 09 August 2020 has consolidated into three top players—CVS, CVS Health earns a narrow economic moat rating from UnitedHealth, and Cigna—controlling roughly 80% of U.S. us. As a top-tier healthcare-focused retail store, pharmacy prescription volumes on an adjusted basis. We believe benefit manager, and insurer, we believe CVS possesses CVS’ leadership position in its PBM operations should help enough scale-related cost advantages to generate it generate excess returns over time. We continue to view economic profits for the long run. Even after the late 2018 the fixed-cost leverage associated with processing about Aetna merger, which cut into returns on invested capital, 2 billion of the nearly 6 billion adjusted prescriptions filled including goodwill, somewhat, we estimate that CVS’ annually in the U.S. as a scale-related advantage. ROICs should remain above its capital costs throughout Additionally, this consolidation of purchasing power helps our explicit 10-year forecast period. CVS extract discounts from drug manufacturers on one end of the transaction and pharmacies on the other end Our view is informed by an analysis of potential changes of the transaction, which helps create value for its clients to the U.S. healthcare system. During the next 10 years, such as insurance plans and employers on their pharmacy we view scenarios where CVS provides medical and cost trends. In addition to its cost-related advantages, we pharmaceutical benefits through employers and even see some switching costs in this business, too, with government entities, such as Medicare Advantage and contract lengths typically around three years and annual Medicaid managed care plans, as much more likely than retention rates in the high 90s for all three of the top-tier the extreme Medicare for All scenario where the private PBM players. Switching the administrative activities, insurance industry no longer exists. In these more likely partner relationships, and pharmacy benefit plan scenarios, we suspect there will be a place for private specifications to a new PBM vendor can be health insurers and related pharmacy benefit managers, time-consuming and onerous, which creates inertia for like CVS, in the U.S. healthcare system for a relatively clients with limited realistic alternatives, in our opinion. long period of time. However, switching is possible, and the loss of specific clients could constrain the firm's growth eventually. In its retail operations, CVS has established significant scale that has enabled it to leverage some negotiating In insurance, we see two moat sources—cost advantage power with suppliers. CVS has a differentiated ability to and network effects. An insurer’s cost advantages relate generate significant volumes through nearly 10,000 primarily to scale, both broadly and locally. CVS’ Aetna pharmacy locations, including in Target stores. This large represents the fifth-largest insurer nationally, measured store network is attractive for pharmacy benefit managers by premiums written, but is more likely the third or fourth when assembling plans to obtain volume-based discounts largest by membership given its sizable fee-based from pharmaceutical manufacturers and also assembling enrollment mix. With such significant scale in the convenient retail store locations that would be attractive fragmented health insurance market, we believe CVS to an insurance plan’s members. In 2019, the firm benefits from a broad cost advantage by being able to dispensed 1.4 billion adjusted prescriptions, and its leverage its fixed centralized costs, which increases the prescription share continues to climb and remains above profit potential of each marginal life covered by the even Walgreens. While it trails Walgreens’ average organization compared with smaller peers. CVS also revenue per store, CVS’ average store revenue remains benefits from scale advantages in specific locations. For significantly higher than the pharmacy average. Scale example, the company is positioned as either the first- or allows CVS to leverage fixed costs (such as pharmacist second-largest insurer in terms of premiums written in salaries and rent) more effectively than subscale peers, two states and the District of Columbia. While that may which has contributed to the improving market share for seem small compared with UnitedHealth (number one or ? © 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. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. Morningstar Equity Analyst Report |Page 3 of 15 CVS Health Corp CVS (XNYS) Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Trailing Dividend Yield % Forward Dividend Yield % Market Cap (Bil) Industry Stewardship QQQQQ 64.96 USD 92.00 USD 0.71 3.08 3.08 85.01 Healthcare Plans Standard 07 Aug 2020 07 Aug 2020 06 Mar 2019 07 Aug 2020 07 Aug 2020 07 Aug 2020 21:42, UTC 20:45, UTC two in 31 states) and Anthem (number one or two in nine 10-year forecast, including potential repurchases. states), CVS beats out top-tier competitors such as Cigna and Humana on that metric in this very fragmented In retail, we forecast low-single-digit revenue growth industry, and we believe its influence is likely even compounded annually during the next five years. While stronger when looking at specific metropolitan areas. we expect some store count growth, most of this increase Local scale advantages allow for greater negotiating will be driven by rising revenue per store, as the new leverage versus service providers than smaller insurers in HealthHub and other new store formats add to potential each community, which contributes to cost advantages. growth. We continue to expect stronger growth from the pharmacy operations versus the front of the store. Also, when local scale advantages are significant enough, However, the pharmacy operations look likely to be we think CVS’ insurance operations benefit from a negatively affected by continued declines in revenue per network effect. For example, in communities where CVS prescription processed, as PBMs continue to exert already has substantial market share, it can offer lower pressure on their pharmacy networks, including CVS' costs or more benefits per member to existing and stores. potential clients than its peers. If that offering is compelling enough, more employers will be attracted to We currently expect low-single-digit revenue growth from CVS’ insurance plans in those communities, and local the PBM business, too, during the next five years. service providers, such as hospitals and physician groups, Specifically, we expect about 2% claims growth to be will have more incentive to join and offer lower prices to somewhat offset by pricing pressure, as new competitors CVS’ insurance networks to gain access to its large, could enter the fray, such as Amazon. growing membership rolls. As CVS’ local market share rises, its negotiating leverage with providers also rises, Finally, at Aetna we expect a positive sales environment which can create a virtuous cycle where CVS attracts even as medical and pharmacy benefits are combined. more clients and more providers to its insurance network Specifically, we project 6% sales growth compounded in that area. Overall, these dynamics create barriers to annually, including membership growth in the low-single entry for would-be competitors, as compiling an digits over the next five years with particular strength in attractively priced provider network in a new geography government programs. would be difficult without an established membership pool. We discount all of these assumptions at a weighted average cost of capital around 7.5%. Fair Value & Profit Drivers Julie Utterback, Analyst, 09 August 2020 Risk & Uncertainty Our fair value estimate for CVS remains $92 per share, Julie Utterback, Analyst, 09 August 2020 which implies a 13 times multiple on 2020 expected CVS faces medium uncertainty, including long-term efforts earnings. to derive synergies from the Aetna acquisition and the ongoing debate around the U.S. healthcare system in the We expect CVS' pro forma revenue, operating profit, and runup to the 2020 election. adjusted earnings per share to grow about 3%, 7, and 8%, respectively, on a compound annual basis from 2019 to The Aetna merger creates integration, execution, and 2024. Investors should note that, after relatively flat financial risks. Combining these two large organizations earnings since 2018, CVS aims to accelerate its will be a multiyear process, which may not go perfectly bottom-line growth to the low double digits by 2022 smooth, and the synergies we anticipate between the through its various cost-saving programs, lower interest organizations may never materialize. Additionally, CVS expense after debt repayment, share repurchases, and took on substantial debt to merge with Aetna, which synergies between its newly combined operations. Our creates another set of financial risks on top of its valuation implies a similar acceleration of earnings operational risks. Also, earnings growth has stalled at CVS growth during that period, including some margin after the merger, and we suspect shares may be expansion through 2024. Also, we expect roughly constrained until the company can accelerate earnings mid-single-digit earnings growth in the outer years of our growth to double-digit levels that are more in line with its ? © 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. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. Morningstar Equity Analyst Report |Page 4 of 15 CVS Health Corp CVS (XNYS) Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Trailing Dividend Yield % Forward Dividend Yield % Market Cap (Bil) Industry Stewardship QQQQQ 64.96 USD 92.00 USD 0.71 3.08 3.08 85.01 Healthcare Plans Standard 07 Aug 2020 07 Aug 2020 06 Mar 2019 07 Aug 2020 07 Aug 2020 07 Aug 2020 21:42, UTC 20:45, UTC peers. The company does not expect double-digit earnings leverage target. For example, CVS is forgoing share growth until 2022. repurchases (while shares appear cheap in our opinion) and only intends to maintain its dividend until it reaches Also, healthcare policy risks may plague health insurers its gross leverage target in the low 3s around 2022. These like CVS in both the near and long terms. The Medicare acquisition-related factors constrain our view of the for All scenario debated in the Democratic primaries company's stewardship. called for the elimination of the private insurance industry, which would have threatened the company's insurance Aside from those acquisition-related concerns, we think operations. While we view this scenario's probability as CEO Larry Merlo has done a decent job leading CVS’ virtually zero in this election cycle after Bernie Sanders operations since 2011. A pharmacist by training, Merlo exited the presidential contest, that policy risk may has been involved with CVS since 1990 and has been threaten the private insurance industry in future election instrumental in its transition to a true healthcare-focused cycles. We see the risk of a public organization. Given the size and scope of the Aetna acquisition, though, we think the success or failure of that option as still viable in this election cycle. Health insurers deal will likely define Merlo's tenure as CEO. Importantly, could play key roles in a public option and could even many key Aetna leaders have remained with the benefit from the expansion of services provided, if the organization following the transaction, including Karen public option merely expands access to insurance rather Lynch who leads the business unit. than causes significant shifts in insurance sources. However, if the public option creates a scenario where a Also, we think the board has put in place a solid significant portion of the employer-based insurance compensation program to align the incentives of population switches to government-sponsored plans, management and shareholders. The bulk of Merlo's CVS' commercial business may suffer. compensation is driven by equity and incentive-based awards with a comprehensive set of goals that we think Stewardship are consistent with building intrinsic value at the firm. Julie Utterback, Analyst, 09 August 2020 Annual cash bonuses are tied primarily to firmwide We give CVS a Standard stewardship rating. operating profit, along with customer satisfaction measures at both the PBM and retail segments. CVS' recent acquisition history represents the most Performance stock units are long-term in nature and significant constraint on this score. While we think most currently focused on Aetna-related synergies and relative of the company's moves made sense strategically, the total shareholder return. In addition, the board recently prices and debt required to make them have been introduced performance stock units that vest over three aggressive, in our opinion. For example, in 2018, CVS years and are tied to EBITDA targets, and the company impaired $6 billion of goodwill related to the $13 billion issues options for executive incentives, as well. 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 ? © 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. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. Morningstar Equity Analyst Report |Page 5 of 15 CVS Health Corp CVS (XNYS) Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Trailing Dividend Yield % Forward Dividend Yield % Market Cap (Bil) Industry Stewardship QQQQQ 64.96 USD 92.00 USD 0.71 3.08 3.08 85.01 Healthcare Plans Standard 07 Aug 2020 07 Aug 2020 06 Mar 2019 07 Aug 2020 07 Aug 2020 07 Aug 2020 21:42, UTC 20:45, UTC insurers and service providers, surged after Super Tuesday Analyst Notes Archive results showed significant support behind moderate Democrat Joe Biden. We do not expect any changes to CVS Turns in Strong Fourth Quarter, but Investments our moats or valuations based on these results, but we to Continue in 2020 and 2021; Shares Undervalued now see the Democratic presidential nomination as a Julie Utterback, Analyst, 12 February 2020 two-horse race between Biden and the more liberal Bernie Narrow-moat CVS Health turned in fourth-quarter Sanders. While delegate tallies still need to be finalized, operating results that slightly beat our expectations on we think it would be difficult for another candidate to win the bottom line. With the company remaining on track to the Democratic nomination, and recent moderate roughly meet expectations during its post-Aetna momentum appears to be rallying healthcare stocks. investment years, we expect to maintain our fair value estimate after these results, and we still view shares as Specifically, the difference between Biden and Sanders undervalued. After acquiring Aetna in late 2018, we would be stark for the healthcare industry. One of the expect significant synergies and potential share hallmarks of Sanders' candidacy is the pursuit of a repurchases (in future periods) to boost adjusted EPS Medicare for All requirement that would eliminate the growth toward the double-digits in 2022 and beyond. private health insurance industry. We have argued that this scenario is highly unlikely in the next 10 years, but if In the quarter, revenue reached $66.9 billion, above Medicare for All were enacted, there would be significant Capital IQ consensus of $64.0 billion, and adjusted consequences for health insurers, dialysis companies, and earnings per share hit $1.73, above consensus of $1.69. other service providers in particular. Biden's stance on the By segment, the PBM business delivered strong 10% healthcare industry appears much more moderate and growth in claims processed to 534 million in the quarter, would likely build on the Obama administration's key but adjusted operating income grew only 2% to $1.4 legislative achievement, the Affordable Care Act. If Biden billion due to ongoing pricing pressure. The were the Democratic nominee, we would expect him to retail/long-term care segment grew 3% year over year to pursue a public option to further increase access to and $22.6 billion in sales, but adjusted operating income affordability of health insurance in the U.S. In this declined 4% to $2.0 billion in the quarter because of scenario, we would expect the U.S. healthcare system to ongoing reimbursement pressure. Operationally, the retail largely remain the same with the potential for higher stores remained strong with 3% same-store sales growth, insurance rolls and an increase in government-sponsored a 7% increase in prescription volume, an 80-basis-point (but not necessarily government-run) programs, like increase in U.S. prescription share to 26.8%, and 1% front Medicare Advantage. On one end of the spectrum, health of store growth. Legacy Aetna performed well, too, insurers with a large concentration in government generating nearly 4% growth in medical membership to programs could benefit from a public option. In general 22.9 million on particular strength in government plans, though, the consolidation of moderate Democrat including the fast-growing Medicare Advantage market momentum behind Biden has acted as a catalyst for where Aetna grew over 30%. healthcare stocks that had been pressured by Sanders' Medicare for All plan. For 2020, management highlighted guidance that looks roughly in line with our expectations after considering a Defensive Nature of Healthcare Firms Should Offer dilution headwind. Specifically, the firm now expects EPS More Protection From Coronavirus Concerns of $7.04-$7.17. Management noted that 2020 EPS would Damien Conover, Sector Director, 19 March 2020 be negatively affected by about $0.08 of share-based The concerns around a global recession due to coronavirus compensation dilution because it is not repurchasing disruptions are weighing on global markets, but the shares until it deleverages to its low-3s goal around 2022. defensive nature of healthcare should hold up on a relative basis, and we don’t expect any significant changes to our Super Tuesday Primary Results Provide Relief Rally healthcare moat ratings. While we may make downward for Health Insurance and Service Providers adjustments to our valuations in healthcare to account for Julie Utterback, Analyst, 04 March 2020 near-term challenges, we expect more modest changes Stocks in several healthcare sectors, including the health relative to recent stock price movements. Our base case ? © 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. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. Morningstar Equity Analyst Report |Page 6 of 15 CVS Health Corp CVS (XNYS) Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Trailing Dividend Yield % Forward Dividend Yield % Market Cap (Bil) Industry Stewardship QQQQQ 64.96 USD 92.00 USD 0.71 3.08 3.08 85.01 Healthcare Plans Standard 07 Aug 2020 07 Aug 2020 06 Mar 2019 07 Aug 2020 07 Aug 2020 07 Aug 2020 21:42, UTC 20:45, UTC calls for a strong economic rebound in 2021 following a The COVID-19 crisis has taken control of the industry's recession in 2020, which should only have modest impacts narrative and pushed Anthem's shares down to about 10 to healthcare valuations, given the defensive nature of times 2020 expected earnings (reaffirmed on March 9, those companies. However, if the coronavirus pandemic 2020) and a PEG ratio below 1 times. Investors appear exerts a sustained impact on the economy, with concerned about two major risks for the MCOs related to significantly higher numbers of patients unemployed and COVID-19. First, medical costs could rise and push down uninsured or underinsured, this could reduce healthcare profits in a severe scenario. However, we suspect the demand to a greater extent. We expect government inflated COVID-19 patient costs could be offset by reduced efforts to reduce the near-term hit can keep most of the volume in other services, such as routine care and elective harder-hit industries in business while effective procedures. Therefore, we have not changed our 2020 EPS treatments emerge. estimates for the industry, and our estimate for Anthem remains roughly in line with management's guidance of On the near-term effects of coronavirus, we expect at least $22.30. Also, even if cost trends spike, the MCOs critically ill coronavirus patients needing essential should be able to reprice policies during the annual medical services and therapies will crowd out more renewal process for 2021 and beyond. elective procedures, new products, and non-critical-care products. Fewer elective procedures will weigh on the The second major risk relates to the economic downturn device makers and service providers. Also, higher-than-expected due to shelter-in-place orders, which is causing massive medical costs focused on the COVID-specific cases could layoffs. If those layoffs are sustained, employer-based reduce profitability for health insurers. With branded drug membership rolls will likely decline. However, all else firms already focused on specialty drugs, we expect less being equal and including the effects of recently generated impact to this industry, but drugs administered in the cash flows on our model, we think Anthem and the other hospital could still feel some crowding out by coronavirus insurers have substantial room for membership to fall in patients. Also, clinical development timelines will 2020 before we would change our fair values, assuming probably face some delays due to coronavirus disruptions, a mild recovery starting in 2021. which will likely slow some new product launches. Additionally, the coronavirus impact on the credit markets CVS Maintains 2020 Bottom-Line Outlook Despite could weigh on more heavily indebted companies, such COVID-19 Concerns; Shares Undervalued as some hospital firms and companies that have recently Julie Utterback, Analyst, 06 May 2020 completed major acquisitions. Narrow-moat CVS Health turned in first-quarter operating results that significantly beat expectations, due to a surge In Discounted MCO Industry, New Best Idea Anthem of activity in its stores and PBM related to shelter-in-place Is Priced Below High-Impact Public Option orders that began in mid-March. Joining the other four Scenario managed care organizations that we cover, CVS Julie Utterback, Analyst, 08 April 2020 management has maintained its 2020 EPS guidance, We have added one of the country's largest health suggesting the pullback in its retail stores, in particular, insurers, Anthem, to our Best Ideas list because of its following initial stocking activities in March should not attractive valuation following the COVID-19-related trip up the rest of 2020. We are maintaining our fair value sell-off. Admittedly, uncertainty surrounds how this crisis estimate for CVS and still view shares as significantly will affect near-term results at Anthem and the other undervalued. managed-care organizations. But we believe narrow-moat Anthem will be able to manage those risks and thrive in In the quarter, revenue reached $66.8 billion (8% growth), the long run, given its strong local scale advantages as above Capital IQ consensus of $64.1 billion, and adjusted the Blue Cross Blue Shield licensee in 14 states. Shares earnings per share hit $1.91 (18% growth), above currently represent an enticing entry point, in our opinion, consensus of $1.63. Management estimates that with recent trades around 65% of our $348 fair value COVID-19 positively influenced its adjusted EPS by $0.10 estimate, making it a very attractive stock even in the in the quarter. By segment, the PBM business delivered discounted MCO industry. 12% growth in claims processed to 541 million in the quarter, including about 125 basis points of benefit from ? © 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. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. Morningstar Equity Analyst Report |Page 7 of 15 CVS Health Corp CVS (XNYS) Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Trailing Dividend Yield % Forward Dividend Yield % Market Cap (Bil) Industry Stewardship QQQQQ 64.96 USD 92.00 USD 0.71 3.08 3.08 85.01 Healthcare Plans Standard 07 Aug 2020 07 Aug 2020 06 Mar 2019 07 Aug 2020 07 Aug 2020 07 Aug 2020 21:42, UTC 20:45, UTC COVID-19, and adjusted operating income grew 25% to expects some offsets later in the year to recent COVID-19 $1.2 billion. The retail/long-term care segment grew 8% benefits. For 2020, CVS now expects adjusted EPS of year over year to $22.7 billion in sales, and adjusted $7.14-7.27, up from $7.04-$7.17 previously, and operating operating income grew 27% to $1.9 billion in the quarter, cash flow of $11.0 billion to $11.5 billion, up from $10.5 which included a surge related to COVID-19 on billion-$11.0 billion previously. We have raised our outlook prescription volume (up 200 basis points on COVID-19) for 2020 in line with that new guidance. However, we have and front of store sales (up 650 basis points on COVID-19). not changed our assumptions beyond that and noted that In health insurance, CVS grew medical membership 2% management still appears to be working toward goals laid sequentially to 23.5 million on strength in government out in previous investor events. Specifically, the company plans. expects modest EPS growth in the next couple of years and is only working toward double-digit earnings growth With these strong first-quarter results, management was by 2022. That is a standard that its insurance peers are able to maintain its bottom-line guidance for 2020, despite achieving now, and we suspect CVS' shares may remain a pullback in momentum in April after initial stocking constrained until it can materially accelerate profit activities in March. For example, front of store sales were growth. down 11% year over year in April, after being up 19% in March. On the bottom line though, the firm still expects EPS of $7.04-$7.17 and operating cash flow of $10.5 billion-$11.0 billion in 2020, and our estimates remain roughly in line with that outlook. CVS Boosts 2020 Bottom-Line Outlook on Favorable Tax Developments; Shares Remain Undervalued Julie Utterback, 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. We 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 ? © 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. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. Quantitative Equity Report | Release: 09 Aug 2020, 20:56 UTC | Reporting Currency: USD | Trading Currency: USD | Exchange:XNYS Page Page 8 of1 15 of 1 CVS Health Corp CVS QQQQQQ 09 Aug 2020 02:00 UTC Last Close Fair ValueQ Market Cap Sector Industry Country of Domicile 07 Aug 2020 09 Aug 2020 02:00 UTC 07 Aug 2020 64.96 82.67 85,013.4 Mil d Healthcare Healthcare Plans USA United States There is no one analyst in which a Quantitative Fair Value Estimate and Quantitative Star Rating are attributed to; however, Mr. Lee Davidson, Head of Quantitative Price vs. Quantitative Fair Value Research for Morningstar, Inc., is responsible for overseeing the methodology that 2016 2017 2018 2019 2020 2021 Quantitative Fair Value Estimate supports the quantitative fair value. As an employee of Morningstar, Inc., Mr. Total Return Davidson is guided by Morningstar, Inc.’s Code of Ethics and Personal Securities Trading Policy in carrying out his responsibilities. For information regarding Conflicts Sales/Share 180 of Interests, visit http://global.morningstar.com/equitydisclosures Forecast Range Forcasted Price 144 Dividend Company Profile Split CVS Health Corp provides an even more integrated Momentum: Neutral 108 healthcare-services offering for its members. Legacy CVS Standard Deviation: 30.20 combined both the largest pharmacy benefit manager, Liquidity: High 72 processing about 2 billion adjusted claims annually, and a sizable pharmacy operation, including nearly 10,000 retail 52.04 52-Wk 77.03 pharmacy locations primarily in the U.S. Adding a managed- 36 care organization with about 23 million medical members 51.72 5-Yr 109.35 gives the company a strong position in the insurance industry -17.6 -5.6 -6.9 16.4 -10.5 Total Return % and should help CVS better control overall healthcare costs for -30.0 -27.1 -1.8 -14.8 -15.6 +/– Market (Morningstar US Index) Quantitative Scores Scores 2.15 2.76 3.05 2.69 3.08 Trailing Dividend Yield % All Rel Sector Rel Country 2.53 2.76 3.05 2.69 3.08 Forward Dividend Yield % Quantitative Moat Narrow 97 96 95 16.9 15.0 21.6 22.2 10.3 Price/Earnings Valuation Undervalued 65 80 71 0.5 0.4 0.4 0.4 0.3 Price/Revenue Quantitative Uncertainty High 97 96 95 Morningstar RatingQ Financial Health Moderate 71 42 71 QQQQQ QQQQ QQQ CVS QQ Q d USA 2015 2016 2017 2018 2019 TTM Financials (Fiscal Year in Mil) Undervalued Fairly Valued Overvalued 153,290 177,526 184,765 194,579 256,776 263,991 Revenue Source: Morningstar Equity Research 10.0 15.8 4.1 5.3 32.0 2.8 % Change 9,454 10,338 9,517 10,170 11,987 14,299 Operating Income 7.4 9.4 -7.9 6.9 17.9 19.3 % Change Valuation Sector Country Current 5-Yr Avg Median Median 5,237 5,317 6,622 -594 6,634 8,259 Net Income Price/Quant Fair Value 0.79 0.83 0.82 0.83 8,412 10,069 8,007 8,865 12,848 15,986 Operating Cash Flow Price/Earnings 10.3 19.6 26.5 20.1 -2,367 -2,224 -1,918 -2,037 -2,457 -2,358 Capital Spending Forward P/E 9.1 — 11.3 13.9 6,045 7,845 6,089 6,828 10,391 13,628 Free Cash Flow Price/Cash Flow 5.3 10.2 18.4 13.1 3.9 4.4 3.3 3.5 4.0 5.2 % Sales Price/Free Cash Flow 6.2 13.8 27.3 19.5 4.63 4.90 6.44 -0.57 5.08 6.29 EPS Trailing Dividend Yield % 3.08 2.42 1.50 2.35 16.9 5.8 31.4 -108.9 — 23.8 % Change Price/Book 1.2 2.3 3.4 2.4 5.35 8.29 7.87 4.22 8.12 8.97 Free Cash Flow/Share Price/Sales 0.3 0.5 4.2 2.4 1.40 1.70 2.00 2.00 2.00 2.00 Dividends/Share 33.76 33.88 34.38 28.28 48.09 49.77 Book Value/Share Profitability Sector Country 1,101 1,061 1,014 1,295 1,302 1,309 Shares Outstanding (Mil) Current 5-Yr Avg Median Median Profitability Return on Equity % 12.8 11.1 12.4 12.9 13.9 14.4 17.8 -1.2 10.9 12.8 Return on Equity % Return on Assets % 3.6 4.3 6.2 5.2 6.2 5.7 7.0 -0.4 3.2 3.6 Return on Assets % Revenue/Employee (K) 910.3 727.4 309.2 325.9 3.4 3.0 3.6 -0.3 2.6 3.1 Net Margin % 1.83 1.89 1.95 1.33 1.23 1.16 Asset Turnover Financial Health Sector Country Current 5-Yr Avg Median Median 2.5 2.6 2.5 3.4 3.5 3.5 Financial Leverage Distance to Default 0.6 0.6 0.6 0.5 17.3 16.3 15.5 16.2 17.7 18.5 Gross Margin % Solvency Score 640.0 — 494.6 552.4 6.2 5.8 5.2 5.2 4.7 5.4 Operating Margin % Assets/Equity 3.5 2.9 1.4 1.7 26,267 25,615 22,181 71,444 64,699 63,481 Long-Term Debt Long-Term Debt/Equity 1.0 0.8 0.1 0.4 37,196 36,830 37,691 58,225 63,864 68,022 Total Equity 16.4 17.7 18.1 18.0 11.6 8.1 Fixed Asset Turns Growth Per Share Quarterly Revenue & EPS Revenue Growth Year On Year % 1-Year 3-Year 5-Year 10-Year Revenue (Bil) Mar Jun Sep Dec Total Revenue % 32.0 13.1 13.0 10.1 2020 66.6 65.2 — — — Operating Income % 17.9 4.9 6.4 6.4 2019 61.6 63.4 64.5 67.7 256.8 34.9 35.8 36.6 Earnings % — 1.1 5.1 7.1 2018 45.7 46.7 47.3 54.9 194.6 2017 44.5 45.7 46.2 48.4 184.8 23.3 Dividends % 0.0 5.6 12.7 20.7 Book Value % 9.1 12.2 8.1 6.7 Earnings Per Share () 13.5 Stock Total Return % 15.2 -3.6 -7.1 10.2 2020 1.53 2.26 — — — 8.0 2019 1.09 1.49 1.17 1.33 5.08 2.2 2.4 2.7 2018 0.98 -2.52 1.36 -0.37 -0.57 2018 2019 2020 2017 0.92 1.07 1.26 3.22 6.44 © 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 is not an offer to buy or sell a security; are not warranted to be correct, complete or accurate; 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, ß analyses or opinions or their use. The information herein may not be reproduced, in any manner without the prior written consent of Morningstar. Please see important disclosures at the end of this report. Morningstar Equity Analyst Report |Page 9 of 15 Research Methodology for Valuing Companies Qualitative Equity Research Overview intangible assets, switching costs, network effect, cost Our model is divided into three distinct stages: At the heart of our valuation system is a detailed projection advantage, and efficient scale. of a company's future cash flows, resulting from our Stage I: Explicit Forecast analysts' research. Analysts create custom industry and Companies with a narrow moat are those we believe In this stage, which can last five to 10 years, analysts company assumptions to feed income statement, balance are more likely than not to achieve normalized excess make full financial statement forecasts, including items sheet, and capital investment assumptions into our globally returns for at least the next 10 years. Wide-moat such as revenue, profit margins, tax rates, changes in standardized, proprietary discounted cash flow, or DCF, companies are those in which we have very high working-capital accounts, and capital spending. Based modeling templates. We use scenario analysis, in-depth confidence that excess returns will remain for 10 years, on these projections, we calculate earnings before competitive advantage analysis, and a variety of other with excess returns more likely than not to remain for at interest, after taxes, or EBI, and the net new analytical tools to augment this process. We believe this least 20 years. The longer a firm generates economic investment, or NNI, to derive our annual free cash flow bottom-up, long-term, fundamentally based approach profits, the higher its intrinsic value. We believe low- forecast. allows our analysts to focus on long-term business drivers, quality no-moat companies will see their normalized which have the greatest valuation impact, rather than short- returns gravitate toward the firm's cost of capital more Stage II: Fade term market noise. quickly than companies with moats. The second stage of our model is the period it will take the company's return on new invested capital—the Morningstar's equity research group (“we," "our") believes To assess the direction of the underlying competitive return on capital of the next dollar invested ("RONIC")— that a company's intrinsic worth results from the future advantages, analysts perform ongoing assessments of to decline (or rise) to its cost of capital. During the Stage cash flows it can generate. The Morningstar Rating for the moat trend. A firm's moat trend is positive in cases II period, we use a formula to approximate cash flows in stocks identifies stocks trading at an uncertainty-adjusted where we think its sources of competitive advantage lieu of explicitly modeling the income statement, discount or premium to their intrinsic worth—or fair value are growing stronger; stable where we don't anticipate balance sheet, and cash flow statement as we do in estimate, in Morningstar terminology. Five-star stocks sell changes to competitive advantages over the next Stage I. The length of the second stage depends on the for the biggest risk-adjusted discount to their fair values several years; or negative when we see signs of strength of the company's economic moat. We forecast whereas 1-star stocks trade at premiums to their intrinsic deterioration. this period to last anywhere from one year (for worth. companies with no economic moat) to 10–15 years or All the moat and moat trend ratings undergo periodic more (for wide-moat companies). During this period, Four key components drive the Morningstar rating: (1) our review and any changes must be approved by the cash flows are forecast using four assumptions: an assessment of the firm's economic moat, (2) our estimate of Morningstar Economic Moat Committee, comprised of average growth rate for EBI over the period, a the stock's fair value, (3) our uncertainty around that fair senior members of Morningstar's equity research normalized investment rate, average return on new value estimate and (4) the current market price. This department. invested capital, or RONIC, and the number of years process ultimately culminates in our single-point star rating. until perpetuity, when excess returns cease. The 2. Estimated Fair Value investment rate and return on new invested capital 1. Economic Moat Combining our analysts' financial forecasts with the decline until the perpetuity stage is reached. In the case The concept of an economic moat plays a vital role not firm's economic moat helps us assess how long returns of firms that do not earn their cost of capital, we only in our qualitative assessment of a firm's long-term on invested capital are likely to exceed the firm's cost of assume marginal ROICs rise to the firm's cost of capital investment potential, but also in the actual calculation capital. Returns of firms with a wide economic moat (usually attributable to less reinvestment), and we may of our fair value estimates. An economic moat is a rating are assumed to fade to the perpetuity period over truncate the second stage. structural feature that allows a firm to sustain excess a longer period of time than the returns of narrow-moat profits over a long period of time. We define excess firms, and both will fade slower than no-moat firms, Stage III: Perpetuity economic profits as returns on invested capital (or ROIC) increasing our estimate of their intrinsic value. Once a company's marginal ROIC hits its cost of capital, over and above our estimate of a firm's cost of capital, we calculate a continuing value, using a standard or weighted average cost of capital (or WACC). Without perpetuity formula. At perpetuity, we assume that any a moat, profits are more susceptible to competition. We growth or decline or investment in the business neither have identified five sources of economic moats: creates nor destroys value and that any new investment provides a return in line with estimated WACC. Morningstar Research Methodology for Valuing Companies Because a dollar earned today is worth more than a dollar earned tomorrow, we discount our projections of cash flows in stages I, II, and III to arrive at a total present value of expected future cash flows. Because we are modeling free cash flow to the firm—representing cash available to provide a return to all capital providers—we discount future cash flows using the WACC, which is a weighted average of the costs of equity, debt, and preferred stock (and any other funding sources), using expected future proportionate long-term market-value weights. ? © 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. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. Morningstar Equity Analyst Report |Page 10 of 15 Research Methodology for Valuing Companies 3. Uncertainty Around That Fair Value Estimate Morningstar Equity Research Star Rating Methodology Morningstar's Uncertainty Rating captures a range of likely potential intrinsic values for a company and uses it to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating represents the analysts' ability to bound the estimated value of the shares in a company around the fair value estimate, based on the characteristics of the business underlying the stock, including operating and financial leverage, sales sensitivity to the overall economy, product concentration, pricing power, and other company-specific factors. Analysts consider at least two scenarios in addition to their base case: a bull case and a bear case. Assumptions are chosen such that the analyst believes there is a 25% probability that the company will perform better than the bull case, and a 25% probability that the company will perform worse than the bear case. The distance between the bull and bear cases is an important indicator of the uncertainty underlying the fair value estimate. Our recommended margin of safety widens as our uncertainty of the estimated value of the equity increases. The more uncertain we are about the estimated value of the equity, the greater the discount we require relative to our estimate of the value of the firm before we would recommend the purchase of the Morningstar Star Rating for Stocks The Morningstar Star Ratings for stocks are defined below: shares. In addition, the uncertainty rating provides Once we determine the fair value estimate of a stock, we guidance in portfolio construction based on risk compare it with the stock's current market price on a daily QQQQQ We believe appreciation beyond a fair risk- tolerance. basis, and the star rating is automatically re-calculated at adjusted return is highly likely over a multiyear time frame. the market close on every day the market on which the The current market price represents an excessively Our uncertainty ratings for our qualitative analysis are stock is listed is open. pessimistic outlook, limiting downside risk and maximizing low, medium, high, very high, and extreme. Please note, there is no predefined distribution of stars. upside potential. That is, the percentage of stocks that earn 5 stars can × Low–margin of safety for 5-star rating is a 20% discount fluctuate daily, so the star ratings, in the aggregate, can QQQQ We believe appreciation beyond a fair risk- and for 1-star rating is 25% premium. serve as a gauge of the broader market's valuation. When adjusted return is likely. × Medium–margin of safety for 5-star rating is a 30% there are many 5-star stocks, the stock market as a whole is discount and for 1-star rating is 35% premium. more undervalued, in our opinion, than when very few QQQ Indicates our belief that investors are likely to × High–margin of safety for 5-star rating is a 40% discount companies garner our highest rating. receive a fair risk-adjusted return (approximately cost of and for 1-star rating is 55% premium. equity). × Very High–margin of safety for 5-star rating is a 50% We expect that if our base-case assumptions are true the discount and for 1-star rating is 75% premium. market price will converge on our fair value estimate over QQ We believe investors are likely to receive a less than × Extreme–margin of safety for 5-star rating is a 75% time, generally within three years (although it is impossible fair risk-adjusted return. discount and for 1-star rating is 300% premium. to predict the exact time frame in which market prices may adjust). Q Indicates a high probability of undesirable risk-adjusted 4. Market Price returns from the current market price over a multiyear time The market prices used in this analysis and noted in the Our star ratings are guideposts to a broad audience and frame, based on our analysis. The market is pricing in an report come from exchange on which the stock is listed, individuals must consider their own specific investment excessively optimistic outlook, limiting upside potential and which we believe is a reliable source. goals, risk tolerance, tax situation, time horizon, income leaving the investor exposed to Capital loss. needs, and complete investment portfolio, among other For more details about our methodology, please go to factors. https://shareholders.morningstar.com. ? © 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. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. Morningstar Equity Analyst Report |Page 11 of 15 Research Methodology for Valuing Companies Other Definitions quantitative report and the quantitative ratings, there is no Value Estimate, current market price, and the Quantitative one analyst in which a given report is attributed to; Uncertainty Rating. The rating is expressed as 1-Star, 2-Star, Last Price: Price of the stock as of the close of the market however, Mr. Lee Davidson, Head of Quantitative Research 3-Star, 4-Star, and 5-Star. of the last trading day before date of the report. for Morningstar, Inc., is responsible for overseeing the methodology that supports the quantitative equity ratings Q: the stock is overvalued with a reasonable margin of Stewardship Rating: Represents our assessment of used in this report. As an employee of Morningstar, Inc., safety. management's stewardship of shareholder capital, with Mr. Davidson is guided by Morningstar, Inc.'s Code of Ethics Log (Quant FVE/Price)<–1*Quantitative Uncertainty particular emphasis on capital allocation decisions. Analysts and Personal Securities Trading Policy in carrying out his consider companies' investment strategy and valuation, responsibilities. QQ: the stock is somewhat overvalued. financial leverage, dividend and share buyback policies, Log (Quant FVE/Price) between (–1*Quantitative execution, compensation, related party transactions, and Quantitative Equity Ratings Uncertainty, –0.5*Quantitative Uncertainty) accounting practices. Corporate governance practices are Morningstar's quantitative equity ratings consist of: only considered if they've had a demonstrated impact on (i) Quantitative Fair Value Estimate QQQ: the stock is approximately fairly valued. shareholder value. Analysts assign one of three ratings: (ii) Quantitative Star Rating Log (Quant FVE/Price) between (–0.5*Quantitative "Exemplary," "Standard," and "Poor." Analysts judge (iii) Quantitative Uncertainty Uncertainty, 0.5*Quantitative Uncertainty) stewardship from an equity holder's perspective. Ratings (iv) Quantitative Economic Moat are determined on an absolute basis. Most companies will (v) Quantitative Financial Health QQQQ: the stock is somewhat undervalued. receive a Standard rating, and this is the default rating in (collectively the "Quantitative Ratings"). Log (Quant FVE/Price) between (0.5*Quantitative the absence of evidence that managers have made Uncertainty, 1*Quantitative Uncertainty) exceptionally strong or poor capital allocation decisions. The Quantitative Ratings are calculated daily and derived from the analyst-driven ratings of a company's peers as QQQQQ: the stock is undervalued with a reasonable Quantitative Valuation: Using the below terms, intended to determined by statistical algorithms. Morningstar, Inc. margin of safety. Log (Quant FVE/Price) >1*Quantitative denote the relationship between the security's Last Price ("“Morningstar," "we," "our") calculates Quantitative Uncertainty and Morningstar's quantitative fair value estimate for that Ratings for companies whether it already provides analyst security. ratings and qualitative coverage. In some cases, the Quantitative Uncertainty: Intended to represent Quantitative Ratings may differ from the analyst ratings Morningstar's level of uncertainty about the accuracy of the × Undervalued: Last Price is below Morningstar's because a company's analyst-driven ratings can quantitative fair value estimate. Generally, the lower the quantitative fair value estimate. significantly differ from other companies in its peer group. quantitative Uncertainty, the narrower the potential range × Fairly Valued: Last Price is in line with Morningstar's of outcomes for that particular company. The rating is quantitative fair value estimate. Quantitative Fair Value Estimate: Intended to represent expressed as Low, Medium, High, Very High, and Extreme. × Overvalued: Last Price is above Morningstar's Morningstar's estimate of the per share dollar amount that quantitative fair value estimate. a company's equity is worth today. Morningstar calculates × Low: the interquartile range for possible fair values is less the quantitative fair value estimate using a statistical model than 10%. Risk Warning derived from the fair value estimate Morningstar's equity × Medium: the interquartile range for possible fair values is Please note that investments in securities are subject to analysts assign to companies. Please go to less than 15% but greater than 10%. market and other risks and there is no assurance or https://shareholders.morningstar.com for information about × High: the interquartile range for possible fair values is guarantee that the intended investment objectives will be fair value estimates Morningstar's equity analysts assign to less than 35% but greater than 15%. achieved. Past performance of a security may or may not be companies. × Very High: the interquartile range for possible fair values sustained in future and is no indication of future is less than 80% but greater than 35%. performance. A security investment return and an investor's Quantitative Economic Moat: Intended to describe the × Extreme: the interquartile range for possible fair values is principal value will fluctuate so that, when redeemed, an strength of a firm's competitive position. It is calculated greater than 80%. investor's shares may be worth more or less than their using an algorithm designed to predict the Economic Moat original cost. A security's current investment performance rating a Morningstar analyst would assign to the stock. The Quantitative Financial Health: Intended to reflect the may be lower or higher than the investment performance rating is expressed as Narrow, Wide, or None. probability that a firm will face financial distress in the near noted within the report. Morningstar's Uncertainty Rating future. The calculation uses a predictive model designed to serves as a useful data point with respect to sensitivity × Narrow: assigned when the probability of a stock anticipate when a company may default on its financial analysis of the assumptions used in our determining a fair receiving a "Wide Moat" rating by an analyst is greater obligations. The rating is expressed as Weak, Moderate, value price. than 70% but less than 99%. and Strong. × Wide: assigned when the probability of a stock receiving Quantitative Equity Reports Overview a "Wide Moat" rating by an analyst is greater than 99%. × Weak: assigned when Quantitative Financial Health <0.2 The quantitative report on equities consists of data, × None: assigned when the probability of an analyst × Moderate: assigned when Quantitative Financial Health statistics and quantitative equity ratings on equity receiving a "Wide Moat" rating by an analyst is less than is between 0.2 and 0.7 securities. Morningstar, Inc.'s quantitative equity ratings are 70%. × Strong: assigned when Quantitative Financial Health >0.7 forward looking and are generated by a statistical model that is based on Morningstar Inc.'s analyst-driven equity Quantitative Star Rating: Intended to be the summary ratings and quantitative statistics. Given the nature of the rating based on the combination of our Quantitative Fair ? © 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. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. Morningstar Equity Analyst Report |Page 12 of 15 Research Methodology for Valuing Companies Other Definitions Last Close: Price of the stock as of the close of the market of the last trading day before date of the report. Quantitative Valuation: Using the below terms, intended to denote the relationship between the security's Last Price and Morningstar's quantitative fair value estimate for that security. × Undervalued: Last Price is below Morningstar's quantitative fair value estimate. × Fairly Valued: Last Price is in line with Morningstar's quantitative fair value estimate. × Overvalued: Last Price is above Morningstar's quantitative fair value estimate. This Report has not been made available to the issuer of the security prior to publication. Risk Warning Please note that investments in securities are subject to market and other risks and there is no assurance or guarantee that the intended investment objectives will be achieved. Past performance of a security may or may not be sustained in future and is no indication of future performance. A security investment return and an investor's principal value will fluctuate so that, when redeemed, an investor's shares may be worth more or less than their original cost. A security's current investment performance may be lower or higher than the investment performance noted within the report. The quantitative equity ratings are not statements of fact. Morningstar does not guarantee the completeness or accuracy of the assumptions or models used in determining the quantitative equity ratings. In addition, there is the risk that the price target will not be met due to such things as unforeseen changes in demand for the company's products, changes in management, technology, economic development, interest rate development, operating and/or material costs, competitive pressure, supervisory law, exchange rate, and tax rate. For investments in foreign markets there are further risks, generally based on exchange rate changes or changes in political and social conditions. A change in the fundamental factors underlying the quantitative equity ratings can mean that the valuation is subsequently no longer accurate. For more information about Morningstar's quantitative methodology, please visit http://global.morningstar.com/equitydisclosures. ? © 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. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. Morningstar Equity Analyst Report |Page 13 of 15 CVS Health Corp CVS (XNYS) Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Trailing Dividend Yield % Forward Dividend Yield % Market Cap (Bil) Industry Stewardship QQQQQ 64.96 USD 92.00 USD 0.71 3.08 3.08 85.01 Healthcare Plans Standard 07 Aug 2020 07 Aug 2020 06 Mar 2019 07 Aug 2020 07 Aug 2020 07 Aug 2020 21:42, UTC 20:45, UTC General Disclosure The analysis within this report is prepared by the person (s) noted in their capacity as an analyst for Morningstar’s equity research group. The equity research group consists of various Morningstar, Inc. subsidiaries (“Equity Research Group)”. In the United States, that subsidiary is Morningstar Research Services LLC, which is registered with and governed by the U.S. Securities and Exchange Commission. The opinions expressed within the report are given in good faith, are as of the date of the report and are subject to change without notice. Neither the analyst nor Equity Research Group commits themselves in advance to whether and in which intervals updates to the report are expected to be made. The written analysis and Morningstar Star Rating for stocks are statements the Report and are subject to change. While financial situation or particular needs of any specific of opinions; they are not statements of fact. Morningstar has obtained data, statistics and recipient. This publication is intended to provide information from sources it believes to be reliable, information to assist institutional investors in making The Equity Research Group believes its analysts make Morningstar does not perform an audit or seeks their own investment decisions, not to provide a reasonable effort to carefully research information independent verification of any of the data, statistics, investment advice to any specific investor. Therefore, contained in the analysis. The information on which the and information it receives. investments discussed and recommendations made analysis is based has been obtained from sources herein may not be suitable for all investors: recipients believed to be reliable such as, for example, the The quantitative equity ratings are not a market call, must exercise their own independent judgment as to company’s financial statements filed with a regulator, and do not replace the User or User’s clients from the suitability of such investments and recommendations company website, Bloomberg and any other the conducting their own due-diligence on the security. The in the light of their own investment objectives, relevant press sources. Only the information obtained quantitative equity rating is not a suitability experience, taxation status and financial position. from such sources is made available to the issuer who assessment; such assessments take into account may is the subject of the analysis, which is necessary to factors including a person’s investment objective, The information, data, analyses and opinions presented properly reconcile with the facts. Should this sharing of personal and financial situation, and risk tolerance all herein are not warranted to be accurate, correct, information result in considerable changes, a statement of which are factors the quantitative equity rating complete or timely. Unless otherwise provided in a of that fact will be noted within the report. While the statistical model does not and did not consider. separate agreement, neither Morningstar, Inc. or the Equity Research Group has obtained data, statistics and Equity Research Group represents that the report information from sources it believes to be reliable, Prices noted with the Report are the closing prices on contents meet all of the presentation and/or disclosure neither the Equity Research Group nor Morningstar, Inc. the last stock-market trading day before the publication standards applicable in the jurisdiction the recipient is performs an audit or seeks independent verification of date stated, unless another point in time is explicitly located. any of the data, statistics, and information it receives. stated. Except as otherwise required by law or provided for in General Quantitative Disclosure General Disclosure (applicable to both Quantitative a separate agreement, the analyst, Morningstar, Inc. The Quantitative Equity Report (“Report”) is derived and Qualitative Research) and the Equity Research Group and their officers, from data, statistics and information within Unless otherwise provided in a separate agreement, directors and employees shall not be responsible or Morningstar, Inc.’s database as of the date of the Report recipients accessing this report may only use it in the liable for any trading decisions, damages or other and is subject to change without notice. The Report is country in which the Morningstar distributor is based. losses resulting from, or related to, the information, for informational purposes only, intended for financial Unless stated otherwise, the original distributor of the data, analyses or opinions within the report. The Equity professionals and/or sophisticated investors (“Users”) report is Morningstar Research Services LLC, a U.S.A. Research Group encourages recipients of this report to and should not be the sole piece of information used by domiciled financial institution. read all relevant issue documents (e.g., prospectus) such Users or their clients in making an investment pertaining to the security concerned, including without decision. The quantitative equity ratings noted the This report is for informational purposes only and has limitation, information relevant to its investment Report are provided in good faith, are as of the date of no regard to the specific investment objectives, objectives, risks, and costs before making an ? © 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. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Morningstar Equity Analyst Report |Page 14 of 15 CVS Health Corp CVS (XNYS) Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Trailing Dividend Yield % Forward Dividend Yield % Market Cap (Bil) Industry Stewardship QQQQQ 64.96 USD 92.00 USD 0.71 3.08 3.08 85.01 Healthcare Plans Standard 07 Aug 2020 07 Aug 2020 06 Mar 2019 07 Aug 2020 07 Aug 2020 07 Aug 2020 21:42, UTC 20:45, UTC investment decision and when deemed necessary, to currently covers and provides written analysis on seek the advice of a legal, tax, and/or accounting • Neither Morningstar, Inc. or the Equity Research please contact your local Morningstar office. In professional. 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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. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Morningstar Equity Analyst Report |Page 15 of 15 CVS Health Corp CVS (XNYS) Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Trailing Dividend Yield % Forward Dividend Yield % Market Cap (Bil) Industry Stewardship QQQQQ 64.96 USD 92.00 USD 0.71 3.08 3.08 85.01 Healthcare Plans Standard 07 Aug 2020 07 Aug 2020 06 Mar 2019 07 Aug 2020 07 Aug 2020 07 Aug 2020 21:42, UTC 20:45, UTC SEBI or any other legal/regulatory body. Morningstar Investment Adviser India Private Limited is a wholly owned subsidiary of Morningstar Investment Management LLC. In India, Morningstar Investment Adviser India Private Limited has one associate, Morningstar India Private Limited, which provides data related services, financial data analysis and software development. The Research Analyst has not served as an officer, director or employee of the fund company within the last 12 months, nor has it or its associates engaged in market making activity for the fund company. *The Conflicts of Interest disclosure above also applies to relatives and associates of Manager Research Analysts in India # The Conflicts of Interest disclosure above also applies to associates of Manager Research Analysts in India. The terms and conditions on which Morningstar Investment Adviser India Private Limited offers Investment Research to clients, varies from client to client, and are detailed in the respective client agreement. For recipients in Japan: The Report is distributed by Ibbotson Associates Japan, Inc., which is regulated by Financial Services Agency. Neither Ibbotson Associates Japan, Inc., nor its representatives, are acting or will be deemed to be acting as an investment advisor to any recipients of this information. For recipients in Singapore: This Report is distributed by Morningstar Investment Adviser Singapore Pte Limited, which is licensed by the Monetary Authority of Singapore to provide financial advisory services in Singapore. Investors should consult a financial adviser regarding the suitability of any investment product, taking into account their specific investment objectives, financial situation or particular needs, before making any investment decisions. ? © 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. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869.
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