First Cut Stock Study Report

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Paul Hutchinson
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1 First Cut Stock Study Report Company Name: CVS Health Corporation Ticker: CVS Date of Study: 11/7/2016 Price: $ Your Name: address: Cliff Turrell cjturrell@gmail.com City: Cincinnati State: OH Chapter Name (if applicable): OKI Tri-State - Cincinnati Model Investment Club Discuss why you consider this to be a high quality, growth company that should be investigated further. Please include comments on historical sales and EPS growth, pre-tax profit margin, return on equity, and debt. CVS is a pharmacy company with the objective of helping people on their path to better health. CVS has become vertically integrated, with a large portion of its business involved in Pharmacy Benefit Management (PBM) (accelerated with purchase of Omnicare in 2014 for $13bn. The Company operates in 2 segments (plus Corporate) and integrates PBM with a significant retail presence throguh 9600 stores. Approximately 1/3 rd of sales are from "convenience goods". CVS has considerable benefits in scale in it's purchasing discussions with drug companies, as it fills 1.3bn claims annually! CVS has made several large acquisitions in recent years, Target Pharmacies (1,900) in 2015 for $2bn, Omnicare (PBM) $13bn in 2014, and Coram (infusian services, & nutrition in 2014 for $2bn. One of the downsides to these acquisitions is it's impact on CVS's Balance Sheet. 56% of CVS's "assets" are represented by Goodwill and intangible assets. I consider this to be very high compared with most other companies. These assets effectively represent the excess of acquisition prices over the net assets acquired. CVS sales growth has been very strong for a large company (2015 sales $153bn) at 11.2% (recent growth accelerated by acquisitions). EPS growth is mostly "up straight and parallel" % over 10 years. The recent drop in EPS is affected by charges involved in retiring debt early, $521MM in 2014, and $542 in 2 nd qtr. 2016! CVS has improved % earned on equity from 10% in 2009 to 13.7% in This stock study reflects the judgment of the contributor(s) only and no investment recommendation is intended. Investors should always conduct their own analysis before making an investment decision. This report may reference websites, products or services not endorsed by BetterInvesting and that may require usage fees. The preparer(s) of this report is not endorsing or promoting the use of these websites, products or services.

2 Debt is up to 42.5% of capital in 2015, it had been 21% in The cash used in acquisitions is the main driver in this change. Briefly describe how the company makes money: CVS earns most of its profits through filling perscriptions, and PBM services through it's retail stores and PBM operations. as gone for "vertical integration", so it cover both retail through its stores, and the PBM function. Projected growth rate for sales: 7% Why did you select this rate? Discuss from where future growth will come. I reviewed estimates from various sources, including Analyst estimates - 2 year growth 12.7% per SSG + Yahoo - Analyst estimates - current year 17.3%, next year 7.9% Value Line shows lower growth expectations of 8.0% Given the loss of PBM prescriptions announced November 8 th reduced sales growth to 7%, well under most projections could see little growth given the latest news! Projected growth rate for earnings per share: 9.6% Why did you select this rate? Reviewed estimates from multiple sources, including Analyst estimates - L/Term growth 14.2% per SSG + Yahoo - Analyst estimates - current year 13.4%, next 5 years 14.57% Value Line 8.4% Used preferred Procedure and see 9.6%, using following factors: Sales 7% growth % pre Tax margin 5.6% (did not use latest quarters due "one-time debt repurchase costs") Taxes 39.3% Shares - current 1,073M, but with massive share repurchases approved, dropped to 1.000, likely conservative assumption! Projected High P/E: 19.0 Why did you select this value? This is lower than 5 year average of high PE's of 20.2, including the 16.0, and 16.4 from 2011 and Current PE is only 16.4 after the dramatic drop in share price seen this week, so reduced from 20.2 to 19. Projected Low P/E: 13 Why did you select this value? Average of 5 year low PE's is 14.5, but given price drop this week - suggest really low PE of 13 more conservative. Projected Low Price: $60.1 This stock study reflects the judgment of the contributor(s) only and no investment recommendation is intended. Investors should always conduct their own analysis before making an investment decision. This report may reference websites, products or services not endorsed by BetterInvesting and that may require usage fees. The preparer(s) of this report is not endorsing or promoting the use of these websites, products or services.

3 Why did you select this value? Used PE X earnings. Note PE of 13 well below recent levels and resulting low price is < 80% of latest depressed price. At the current price, the stock is a (check one): Buy or Hold or Sell At the current price, the upside-downside ratio is: 3.8 to 1 Compound Annual Return Using Forecast High P/E: 14.4% Your final recommendation (check one): Buy or Hold or Sell Explain: I believe estimates used are conservative. CVS appears to be a buying opportunity and its dividend appears to be quite secure. CVS is moving dividend payout to 35%, I used 33% payout ratio. A risk factor is what impact the potential replacement of Obamacare may have on this industry. It would appear as though drug providers are unliklely to suffer greatly. CVS's PBM may also be under threat if large mergers in Healthcare are allowed to go forward (Aetna - Humana), their scale could encourage them to create their own PBM and eliminate the need for 3 rd party PBM's. Note that CVS has significant Goodwill and Intangible Assets on its Balance Sheet - if the Omnicare purchase stopped creating anticipated returns, it is possible some of these assets would have to be written down. This stock study reflects the judgment of the contributor(s) only and no investment recommendation is intended. Investors should always conduct their own analysis before making an investment decision. This report may reference websites, products or services not endorsed by BetterInvesting and that may require usage fees. The preparer(s) of this report is not endorsing or promoting the use of these websites, products or services.

4 Stock Selection Guide Company CVS Health Date 11/09/16 Prepared by TURRELL Data taken from BI Stock Data Where traded NYS Industry Health Care Plans Capitalization --- Outstanding Amounts Reference Preferred ($M) 0.0 % Insiders % Institution Common (M Shares) 1, Debt ($M) 26,733.0 % to Tot Cap 42.6 % Pot Dil VISUAL ANALYSIS of Sales, Earnings, and Price Symbol: CVS FY 2016 Q3 Latest Quarter Year Ago Quarter Percentage Change Sales ($M) 44,615 38, % Earnings Per Share % (1) Historical Sales Growth 11.6% (3) Historical Earnings Per Share Growth 11.3% (2) Estimated Future Sales Growth 7.0% (4) Estimated Future Earnings Per Share Growth 9.6%

5 2 EVALUATING Management 5 5-YEAR POTENTIAL This combines price appreciation with dividend yield to get an estimate of total return. It provides a standard for comparing income and growth stocks. A Indicated Annual Dividend Closing Price B AVERAGE YIELD - USING FORECAST HIGH P/E Avg. % Payout 33.0 % 1.7 % Forecast High PE C COMPOUND ANNUAL RETURN - USING FORECAST HIGH P/E Annualized Appreciation Average Yield Annualized Rate of Return 12.6 % 1.7 % 14.4 % % Current Yield AVERAGE YIELD - USING FORECAST AVERAGE P/E Avg. % Payout 33.0 % 2.1 % Forecast Average PE COMPOUND ANNUAL RETURN - USING FORECAST AVG P/E Annualized Appreciation Average Yield Annualized Rate of Return 8.8 % 2.1 % 10.9 % CVS Health Last 5 Year Avg. Pre-tax Profit on Sales 5.1% 5.7% 6.3% 6.0% 5.8% 5.4% 5.1% 5.9% 5.5% 5.6% 5.5% % Earned on Equity 14.3% 8.9% 9.5% 10.0% 9.0% 9.0% 9.9% 11.5% 11.9% 13.7% 11.2% % Debt To Capital 33.8% 25.1% 25.4% 23.8% 21.1% 20.8% 20.7% 26.1% 25.4% 42.5% 27.1% 3 PRICE-EARNINGS HISTORY as an indicator of the future This shows how stock prices have fluctuated with earnings and dividends. It is building block for translating earnings into future stock prices. CLOSING PRICE (11/09/16) HIGH THIS YEAR LOW THIS YEAR A B C D E F G H Year Price Earnings Price Earnings Ratio Dividend % Payout % High Yield High Low Per Share High A / C Low B / C Per Share F / C * 100 F / B * AVERAGE CURRENT/TTM AVERAGE PRICE EARNINGS RATIO: 17.4 CURRENT PRICE EARNINGS RATIO: EVALUATING RISK and REWARD over the next 5 years Assuming one recession and one business boom every 5 years, calculations are made of how high and how low the stock might sell. The upside-downside ratio is the key to evaluating risk and reward. A HIGH PRICE - NEXT 5 YEARS Avg. High P/E 19.0 X Estimate High Earnings/Share 7.31 Forecasted High Price $ B LOW PRICE - NEXT 5 YEARS (a) Avg. Low P/E (b) Avg. Low Price of Last 5 Years (c) Recent Market Low Price (d) Price Dividend Will Support 13.0 X Estimate Low Earnings/Share 4.62 Forecasted Low Price $ Indicated Dividend High Yield Selected Forecasted Low Price $ 60.1 C ZONING using 25%-50%-25% Forecasted High Price Minus Forecasted Low Price Range. 25% of Range 19.7 Buy Zone Hold Zone Sell Zone % 60.1 to to to Present Market Price of is in the BUY Zone D UPSIDE DOWNSIDE RATIO (POTENTIAL GAIN VS. RISK OR LOSS) High Price Minus Present Price Present Price Minus Low Price To 1 E PRICE TARGET (Note: This shows the potential market price appreciation over the next five years in simple interest terms.) High Price Closing Price X % Appreciation

6 Study Notes Subject 1st Cut CVS - SSG Description Sales growth 7% conservative vs 12.7% analysts Earnings growth 9.6%, used preferred proceedure, analysts 14.2% High PE dropped below 5 year high PE average of 20.2 as current PE is low - after stock dropped. LOW PE 13 - below 5 year average LOW PE of 14.5% LOW price - used Low PE 13 at current 2015 earnings, result is under 80% of current price, after the fall! Should be conservative. Note study starts from prior year, not current quarter as we have unusual costs in quarter as CVS retired high cost debt and took an earnings charge over $500MM!

Stock Selection Guide

Stock Selection Guide Company Dycom Industries Date 12/06/18 Prepared by HENRIKSON Data taken from BI Stock Data Where traded NYS Industry Engineering & Construction Capitalization --- Outstanding Amounts