The $1 trillion shortfall in state pensions; and is CVS a buy for your portfolio?

Tuesday, November 22nd, 2016

Businesses are expected to do well over the next four years under a Trump administration, as well as a Republican Senate and House. This will hopefully help the $1 trillion shortfall in state pension plans.

Unfortunately these pension plans sold stocks when they were low, back in 2008 and 2009, and have yet to recover.

It appears that leaders of state pension plans are too emotional and forced the managers to sell the stocks in the pension plan; unfortunately they were not buying as we were here at Wilsey Asset Management.

Having done so, they probably would have been overfunded and been in much better shape, like in 1997.

But now, because of their panic and not buying low when they should have, they face the worst underfunding in 50 years.

The state with the worst deficit per-person is New Jersey, where every person owes $10,700 to fund the pension plan and bring it back up to par.

I was surprised to see that California is not in too bad of shape, with every Californian owing about $1,700 to bring that state pension up to par.

The citizens of Wisconsin must be very happy, because their plan is fully funded.

One other problem with the state pension plans: for safety reasons, many of the plans invested in bonds, and we are now in the biggest bond bubble in probably 60 years.

So not only did those in charge of the pension plans sell stocks low when they should have been buying, they also invested in bonds and will probably struggle even more in future years as interest rates increase and bond prices decrease.

Once again, had they just stayed in stocks these plans would have probably been overfunded, saving the states billions of dollars.

 The stock of the week is CVS Health Corporation (CVS).

The stock closed on Tuesday, November 22nd at $73.59 and has a 52-week high of $106.67 and 52-week low of $69.30.

Over the last year, compared with the previous year, sales have increased by 15.8%. This is better than the industry average growth of 10% over the same timeframe.

Earnings-per-share year-over-year increased 5.3%, just slightly better than the industry average of 5.2%.

It is always important what investors pay for the earnings, the book value, the cash flow, and the sales.

The current price-to-earnings ratio is 15.8, which is better than the industry average at 17.5.

Price-to-sales is inexpensive for both: the industry at 0.34 and the company at 0.46.

Price-to-tangible book value is not material for both the company and the industry, because both have done acquisitions over the years which has increased the goodwill on the balance sheet.

Price-to-cash flow is 8.1 for the industry, and unfortunately CVS is slightly higher at 10.5.

Investors will enjoy a 2.3% dividend, and the company only uses 34% of the earnings to pay out that dividend.

Return on equity checks in at 13.94, which is not quite as impressive as the industry at 17 over the last 12 months. However CVS has a better net profit margin at 3%, versus the industry at 1.9%.

The financial strength of CVS looks pretty good, with a current ratio of 1.2 and just slightly higher than the industry at 1.1. This demonstrates the company has favorable liquidity to pay off short-term liabilities. Debt-to-equity also looks attractive for CVS, at 74.4, less than the industry at 81.9.

Checking the receivables of the company over the last 12 months, they are 13.1, not quite at the industry’s level of 14.4.

CVS’s inventory turnover is 10.4, also not quite as high as the industry at 12.2.

Looking forward to the year ending December 2017, the mean estimate of 12 analysts are looking for earnings-per-share of $5.50, which would yield a target sell price of $90.75.

The target sell price is only 23% away from the current price, so I would put this company on the watch lists. This would be to see if it would drop a little bit more, so the potential return could be 30% or more.

Do you have a question or a company you'd like me to take a look at? Email me at Brent@WilseyAssetManagement.com!


Brent Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. 

Chase is a financial analyst for Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760 as the co-host for the Smart Investing show with his father Brent Wilsey. Information is provided by Reuters.

Sign up for our free weekly e-newsletter for economic updates, investment advice, and various company analyses. Articles are written by well renowned investment expert Brent Wilsey.  Please visit our Archived Newsletters tab to view past articles.

Would you like the Smart Investing E-Newsletter sent to your inbox every Tuesday?