Report
Valens Research

Valens Equity Insights and Inflections - 2021 03 30

Current market expectations for CVS are excessively pessimistic. Markets expect UAFRS-based (Uniform) ROA (ROA') to roll over to prior lows from 2010-2011. However, the company's fundamental strategy is likely to lead to continued ROA' expansion.

CVS has been evolving into a full-service healthcare firm since their acquisition of Caremark in 2007, which led to initial ROA' expansion to 15%-17% levels. This was followed by continued investment in healthcare solutions and monetizing their data on customers leading to an ROA' plateau shift the past three years, to 19%+ levels.

With the new acquisition of Aetna to add to this structure, the company is now positioned to
recreate the exact fundamental framework that UnitedHealthcare has created over the past
10+ years that has led to a 1,500bps+ expansion in ROA'. With the market not giving the
company credit for this strategy, there appears to be opportunities for significant equity
upside.

Management alignment and confidence in recent calls point to reasons to believe in further
operational improvement. Management is specifically compensated to focus on RONA and
EBITDA expansion, meaning they will be driving ROA' expansion while growing, not seeing
declines, as is currently expected.

Also, management has consistently shown a lack of concern about hitting on synergy targets or executing on the Aetna acquisition, and has showed confidence about continued execution, even through the pandemic. In fact, they are showing sustained confidence in their outlook for the company's fundamentals, their digital strategy, and around synergy trends.

Considering low market expectations, in terms of pessimism for both growth and Uniform ROA recovery, positive tailwinds and management's alignment and strategy, and growing
confidence about executing on their strategy for the business, current low equity valuations
appear unreasonable, spelling potential for equity upside.

K Q4 2020 Embedded Expectations Analysis – Market expectations are for Uniform ROA to remain stable, but management may be concerned about market share, at-home demand, and growth

KHC Q4 2020 Embedded Expectations Analysis – Market expectations are for Uniform ROA to decline, and management may be concerned about divestitures, Taste Elevation, and marketing

XRAY Q4 2020 Embedded Expectations Analysis – Market expectations are for Uniform ROA to rebound, but management may have concerns about organic sales, margins, and the implant market

CVS, K, KHC, XRAY, ADP, ADT, AMN, BKNG, DHI, EL, EQR, GNRC, GOOGL, HOLX, IPGP, LGIH, SPGI, SSNC, SWKS, UNFI, YELP
Underlyings
ADT Inc

ADT is a provider of monitored security and interactive home and business automation solutions in the United States and Canada. The company's monitored security and automation offerings involve the installation and monitoring of security and premises automation systems designed to detect intrusion; control access; sense movement, smoke, fire, carbon monoxide, flooding, temperature, and other environmental conditions and hazards; and address personal emergencies. The company's products and services include interactive technologies to allow its customers to remotely monitor and manage their residential and commercial environments by adding automation capabilities to its monitored security systems.

Alphabet Inc. Class A

Alphabet is a holding company. Through its subsidiaries, the company is engaged in a collection of businesses, which its primary business is Google. The company reports all non-Google businesses collectively as Other Bets. Google's main products and platforms are Android, Chrome, Gmail, Google Drive, Google Maps, Google Play, Search, and YouTube. The company also provides advertisers with tools that help them attribute and measure their advertising campaigns. In addition, Other Bets includes Access, Calico, CapitalG, GV, Verily, Waymo, and X, among others. Other Bets primarily engages in the sales of internet and TV services through Access as well as licensing and research and development services through Verily.

AMN Healthcare Services Inc.

AMN Healthcare Services provides talent solutions for the healthcare sector. The company's talent solutions provides management, staffing, recruitment, technology, analytics, and related services to manage healthcare workforce needs. The company provides its healthcare personnel, from nurses, doctors, and allied health personnel to healthcare leaders and executives. The company's workforce solutions and staffing services include: travel nurse staffing; rapid response nurse staffing and labor disruption services; local, or per diem, staffing; locum tenens staffing; allied staffing; physician permanent placement services; interim leadership staffing and executive search services; and recruitment process outsourcing.

Automatic Data Processing Inc.

Automatic Data Processing is a provider of cloud-based human capital management (HCM) solutions to employers, providing solutions to businesses of various sizes. The company's two reportable business segments are Employer Services, which provides a range of technology-based HCM solutions, including payroll services, benefits administration, talent management, HR management, workforce management, compliance services, insurance services and retirement services; and Professional Employer Organization, which provides clients with employment administration outsourcing solutions through a relationship in which employees who work for a client are co-employed by the company and the client.

Booking Holdings Inc.

Booking Holdings provides travel and restaurant online reservation and related services. The company's brands include: Booking.com and Rentalcars.com, in which Booking.com provides booking online accommodation reservations, based on room nights booked, and Rentalcars.com provides online rental car reservation services; KAYAK, which provides an online price comparison service; Priceline, which provides consumers hotel, rental car and airline ticket reservation services, and vacation packages and cruises; Agoda, which is an online accommodation reservation service; and OpenTable, which provides online restaurant reservation services to consumers and reservation management services to restaurants.

CVS Health Corporation

CVS Health is a health company. The company's segments are: Pharmacy Services, which provides a range of pharmacy benefit management solutions, including plan design offerings and administration, formulary management, and retail pharmacy network management services; Retail/Long-Term Care (LTC), which sells prescription drugs and general merchandise, including over-the-counter drugs, provides health care services through its MinuteClinic? walk-in medical clinics and conducts LTC pharmacy operations; and Health Care Benefits, which provides a range of voluntary and consumer-directed health insurance products and related services, including medical, pharmacy, dental and behavioral health plans.

D.R. Horton Inc.

D.R. Horton is a homebuilding company. The company's business operations consist of homebuilding, a majority-owned residential lot development company, financial services and other activities. The company's financial services operations provide mortgage financing and title agency services to homebuyers in its homebuilding markets. The company's subsidiary, DHI Mortgage, provides mortgage financing services primarily to its homebuyers and generally sells the mortgages it originates and the related servicing rights to third-party purchasers. The company's subsidiary title companies serve as title insurance agents by providing title insurance policies, examination and closing services, primarily to its homebuyers.

DENTSPLY SIRONA Inc.

DENTSPLY SIRONA is a manufacturer of dental products and technologies. The company's Consumables segment is responsible for the design, manufacture, sales and distribution of the company's dental consumable products which include preventive, restorative, endodontic, and dental laboratory products. The company's Technologies and Equipment segment includes responsibility for the design, manufacture, sales and distribution of the company's dental technology and equipment products and healthcare consumable products, including dental implants, computer-aided design/computer-aided manufacturing systems, orthodontic clear aligner products, imaging systems, treatment centers, instruments, and consumable medical device products.

Equity Residential

Equity Residential is a real estate investment trust. The company focuses on the acquisition, development and management of rental apartment properties. The company is the general partner of, and owns an ownership interest in ERP Operating Limited Partnership (ERPOP). All of the company's property ownership, development and related business operations are conducted through ERPOP and those entities/subsidiaries owned or controlled by ERPOP (collectively, Operating Partnership). The Operating Partnership holds substantially all of the assets of the company The company, directly or indirectly through investments in title holding entities, owns all or a portion of its properties located in several states and the District of Columbia.

Estee Lauder Companies Inc. Class A

Estee Lauder Companies is a manufacturer and marketer of skin care, makeup, fragrance and hair care products. The company's products are sold under a number of brand names including: Estee Lauder, Clinique, Origins, MzAzC, Bobbi Brown, La Mer, Jo Malone London, Aveda and Too Faced. The company is also the global licensee for fragrances, cosmetics and/or related products sold under various designer brand names. The company's products include skin care, makeup and related items such as compacts, brushes and other makeup tools, fragrance sold in various forms, hair care, and other ancillary products and services.

Generac Holdings Inc.

Generac Holdings is a designer and manufacturer of a range of power generation equipment and other power products serving the residential, light commercial and industrial markets. The company's products include residential, commercial and industrial standby generators, as well as portable and mobile generators used in a range of applications. Other engine powered products that the company designs and manufactures include light towers which provide temporary lighting for various end markets; commercial and industrial mobile heaters and pumps used in the oil and gas, construction and other industrial markets; and a product line of outdoor power equipment for residential and commercial use.

Hologic Inc.

Hologic is a developer, manufacturer and supplier of diagnostics products, medical imaging systems, surgical products and light-based aesthetic and medical treatment systems. The company's segments are: Diagnostics, which provides diagnostic products which are used to aid in the diagnosis of human diseases; Breast Health, which provides solutions for breast cancer care for radiology, pathology and surgery; Medical Aesthetics, which provides aesthetic treatment systems, including SculpSure, PicoSure and MonaLisa Touch; GYN Surgical, which includes NovaSure Endometrial Ablation System to treat abnormal uterine bleeding; and Skeletal Health, which includes the Horizon DXA, a dual energy x-ray system.

IPG Photonics Corporation

IPG Photonics is a developer and manufacturer of a line of fiber lasers, fiber amplifiers and diode lasers that are used in various applications, primarily in materials processing. The company designs and manufactures a range of optical fiber-based lasers and amplifiers. The company also makes packaged diodes, direct diode lasers, laser systems and communications components and systems. A majority of the company's products are designed to be used as general-purpose energy or light sources.

Kellogg Company

Kellogg is engaged in the manufacture and marketing of ready-to-eat cereal and convenience foods. The company's principal products are snacks, such as crackers, savory snacks, toaster pastries, cereal bars, granola bars and bites; and convenience foods, such as, ready-to-eat cereals, frozen waffles, veggie foods and noodles. The company's snacks brands are marketed under brands such as Kellogg's, Cheez-It, Pringles, Austin, Parati, and RXBAR. The company's cereals and cereal bars are generally marketed under the Kellogg's name, with some under the Kashi and Bear Naked brands. The company's frozen foods are marketed under the Eggo and Morningstar Farms brands.

Kraft Heinz Company

Kraft Heinz is a food and beverage company. The company manufactures and markets food and beverage products, including condiments and sauces, cheese and dairy, meals, meats, refreshment beverages, coffee, and other grocery products throughout the world. The company has three reportable segments defined by geographic region: United States, Canada, and Europe, Middle East, and Africa. The company's remaining businesses are combined and disclosed as Rest of World. Rest of World comprises two operating segments: Latin America and Asia Pacific.

LGI Homes Inc.

LGI Homes is a holding company. Through its subsidiaries, the company is engaged in the design, construction, and sale of new homes in markets in Texas, Arizona, Florida, Georgia, New Mexico, South Carolina, North Carolina, Colorado, Washington, Tennessee, Minnesota, Oklahoma, Alabama, California, Oregon, and Nevada. The company's product offerings include entry-level homes, including both detached homes and townhomes, and move-up homes sold, which are sold under its LGI Homes brand, and its luxury series homes, which are sold under its Terrata Homes brand. The company's homebuilding operations are organized and managed by seven divisions: West, Northwest, Central, Midwest, Florida, Southeast and Mid-Atlantic.

S&P Global Inc.

S&P Global is a provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide. The company's segments include: S&P Global Ratings, which provides credit ratings, research and analytics; S&P Global Market Intelligence, which provides multi-asset-class data, research and analytical capabilities that integrate cross-asset analytics and desktop services; S&P Global Platts, which provides information and benchmark prices for the commodity and energy markets; and S&P Dow Jones Indices, which provides a variety of valuation and index benchmarks for investment advisors, wealth managers and institutional investors.

Skyworks Solutions Inc.

Skyworks Solutions is a provider of analog semiconductors that connect people, places, and things, spanning a number of applications within the aerospace, automotive, broadband, cellular infrastructure, connected home, industrial, medical, military, smartphone, tablet and wearable markets. The company's product portfolio consists of various solutions, including: amplifiers, antenna tuners, attenuators, circulators/isolators, wireless analog system on chip, direct current (DC)/DC converters, demodulators, detectors, diodes, directional couplers, diversity receive modules, filters, front-end modules, hybrid, light emitting diode drivers, low noise amplifiers, mixers, and modulators.

SS&C Technologies Holdings Inc.

SS&C Technologies Holdings is a holding company. Through its subsidiaries, the company is a provider of software products and software-enabled services that allow financial services providers to automate business processes and manage their information processing requirements. The company provides its solutions to clients principally within the institutional asset and wealth management, alternative investment management, financial advisory and financial institutions vertical markets. In addition, the company's clients include commercial lenders, real estate investment trusts, corporate treasury groups, insurance and pension funds, municipal finance groups and real estate property managers.

United Natural Foods Inc.

United Natural Foods is a distributor of natural, organic, specialty, produce, and grocery and non-food products, and provider of support services in the United States and Canada. The company's selection of products includes nationally advertised brand name and private-label products, including grocery, general merchandise, home, health and beauty care, and pharmacy, which are sold through its Wholesale segment to wholesale customers and through its subsidiary, SUPERVALU INC.'s-operated retail stores to shoppers. The company provides marketing services for its customers and suppliers, including consumer and trade marketing programs, as well as programs to support suppliers in understanding its markets.

Yelp Inc

Yelp provides a platform to both consumers and businesses by helping each discover and interact with the other. The reviews contributed to the company's platform cover a set of local business categories, including restaurants, shopping, beauty and fitness, arts, entertainment and events, home and local services, health, nightlife, travel and hotel, auto and other categories. The company provides a range of free and paid advertising products to businesses of all sizes, including the ability to deliver targeted search advertising to large local audiences through its website and mobile app. The company also provides several features and consumer-interactive tools.

Provider
Valens Research
Valens Research

In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:

  • GAAP and IFRS have failed to provide rules for reliable financial statement reporting
  • Stock analyst recommendations are not grounded in disciplined financial analysis
  • Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
  • Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available

We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.

  • Corporate credit ratings remain years behind the fundamental underpinnings of company performance
  • Stock analysts continue to make recommendations with deeply inherent biases
  • Research firms have failed to break down the walls between credit, equity, and macroeconomic research
  • The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming

The integrity of Valens Research is founded in our disciplined processes and analytics. No “star” analysts. No corporate advisory relationships. No-nonsense opinions and recommendations.

Analysts
Valens Research

Other Reports on these Companies
Other Reports from Valens Research

ResearchPool Subscriptions

Get the most out of your insights

Get in touch