The Vilas Fund recently published its Q1 2019 Investor Letter (download here), in which it shares its quarterly performance, reporting 34.3% gain in the period. The fund also posted short comments on several holdings, among which were CVS Health Corporation (NYSE:CVS) and Walgreens Boots Alliance, Inc. (NASDAQ:WBA). For these two companies, The Vilas Fund said the following:
“CVS and Walgreens (CVS and WBA)
CVS and Walgreens have had a tough year. The industry has experienced slowing branded drug price inflation, lower generic inflation, and lower reimbursements than expected. We believe all these pressures are temporary. However, it is clear that Amazon has set its sights on the industry, which has dramatically depressed the multiples CVS and Walgreens are trading at. Roughly speaking, both are trading at 8.5-9 times current year earnings estimates, compared to 16-18 times, on average, in the past. Their dividend yields are 3.7% for CVS and 3.2% for Walgreens, both significantly higher than the 2.9% yield on the 30-year US Treasury. Walgreen’s has raised its dividend 45 years in a row, and we expect this trend to continue. When the temporary headwinds subside and partially reverse, we expect the earnings of both to return to the high single digit earnings per share growth range. Additionally, we don’t expect Amazon to be very successful with its strategy given the fact that most people need immediate access to medicine, the incumbents will mail your prescription for free already, and that copays are fixed regardless of where your prescription is filled. Having the option of quickly driving to grab your prescription at roughly 10,000 locations each, often open 24/7, is a valuable service and network effect that we don’t believe will go away. These shares should produce an 18% return without multiple expansion, driven by dividends, retained earnings to be used for expansion, debt repayment or share repurchases, and profit growth from rising prescription volumes. Adding in a 50-70% valuation expansion, and future returns should rise to the mid-20% range over the next 5 years.”
CVS Health Corporation is a Woonsocket-based Pharmacy Benefit Manager, and Walgreens Boots Alliance, Inc. is a Deerfield -based holding company, which owns and runs Walgreens, Boots, and other pharmaceutical manufacturers and pharmacy-related businesses. Year-to-date, CVS’ stock lost 15.88% closing on May 10th at $55.16, while WBA’s stock lost 21.49%, and had a closing price on May 10th of $53.42.
This article is originally published at Insider Monkey.