Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie School of Management

Krishnakumar Bakthisaran [krishnakumar-bakthisaran@uiowa.edu]

CVS Health (CVS) November 11, 2015

Consumer Staples– Retail and Health Care Stock Rating HOLD

Investment Thesis Target Price $103-107 CVS Health is uniquely positioned to tap into increasing demand due to health reform with business units that include CVS Caremark, one of the nation’s leading PBMs (pharmacy benefit manager) and CVS Pharmacy, one of the nation’s leading retail pharmacy chains. We however see significant headwinds in the form of increasing competition, pricing pressures and an increasing demand for pricing transparency. We thus make a ‘HOLD’ recommendation and will wait for the price to become more attractive. Drivers of Thesis

CVS’s recent acquisition of Target’s pharmacies and Omnicare acquisitions add complimentary strategic capabilities and geographic footprint that will drive revenue in the long term especially in Specialty and Retail segments, which we model to grow 12% and 4% CAGR respectively till 2019.

We model strong cash balances for CVS despite $15B in recent acquisitions and believe the company could look at other strategic acquisitions going forward.

Health care reform has continued to add newly insured people; this combined with the steady increase in per capita drug expenditures leave CVS Health well positioned in the future with our model growth rate of sales at 4.6% CAGR till 2019.

Risks to Thesis

The weak economic environment might lead to low disposable incomes that can in turn cause slowdown in front store sales which contributes significantly to CVS’s bottom line

Increased competition in both the retail pharmacy segment as well as the PBM segment pose significant near term headwinds

Henry Fund DCF $103.40 Henry Fund DDM $97.04 Relative Multiple $98.66 Price Data Current Price $103.60 52wk Range $81.37 – 113.65 Consensus 1yr Target $120.18 Key Statistics Market Cap (B) $115.28 Shares Outstanding (M) 1.12B Institutional Ownership 87.40 Five Year Beta 0.97 Dividend Yield 1.35% Price/Earnings (TTM) 25.05 Price/Earnings (FY1) 17.18 Price/Sales (TTM) 0.79 Price/Book (mrq) 3.11 Profitability Operating Margin 6.17% Profit Margin 3.27% Return on Assets (TTM) 7.62% Return on Equity (TTM) 12.66%

Earnings Estimates Year 2012 2013 2014 2015E 2016E 2017E

EPS $3.02 $3.75 $3.97 $4.31 $4.49 $4.70

Growth 17.45% 24.07% 6.06% 8.46% 4.24% 4.61%

12 Month Performance Company Description

CVS Health Corporation provides integrated pharmacy health care services in the US. The company operates through Pharmacy Services and Retail Pharmacy segments. The Pharmacy Services segment offers pharmacy benefit management services. The Retail Pharmacy segment sells prescription drugs, OTC drugs, beauty products and cosmetics amongst others. As of December 31, 2014, it operated 7,822 retail drugstores, 860 health care clinics, 17 onsite pharmacy stores, 27 retail specialty pharmacy stores.1

17.212.7

22.4

14.0

45.1

19.1

0

10

20

30

40

50

P/E ROE

CVS Industry Sector

Source: Yahoo Finance

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

O N D J F M A M J J A S

CVS S&P 500

Source: Yahoo Finance

Page 2

EXECUTIVE SUMMARY

We think CVS Health is uniquely positioned to take advantage of the ever increasing health care spending with its unique business units of both Pharmacy Benefit Management and retail pharmacy segments.

The Pharmacy Benefit Management line has seen the company bring in net new client business of about $11B and boasts of a high retention rate of 96% as of June 20153 which is one of the highest in the industry. We expect the PBM segment to continue to perform strongly primarily because of the strong growth due to Health plans (which accounts for 80% of the new business wins). In this segment, CVS seems to have got the pricing right and has also been able to follow it up with its host of integrated offerings downstream. We model a sales growth rate of 11.5% in the near term and 12% increase primarily from the gains due to the recent Omnicare acquisition.

We view the acquisition of Target’s nearly 1700 retail pharmacy stores favorably as it provides the company a strong footprint in a highly capital efficient way. However, we are cautious about the retail segment’s future prospects as the company continues to face ever increasing competition from its competitors. We model a 3% growth in the initial years and a 3.25% growth that we think might be driven by the Target acquisitions.

Overall, while we think the company has solid earnings potential, we do not see enough upside yet and recommend a HOLD.

COMPANY DESCRIPTION

CVS Health (formerly CVS Caremark) operates one of the largest drug store chains and pharmacy benefit managers in the U.S., based on revenues, net income and store count. The company’s drug stores offer prescription drugs and a wide assortment of general merchandise, including OTC drugs, beauty products and cosmetics, film and photo finishing services, seasonal merchandise, greeting cards and convenience foods2. Pharmacy benefit management offerings include mail order pharmacy service, specialty pharmacy services, plan design and administration, formulary management and claims processing2.

The company’s revenues split up between the Pharmacy Benefit Management and the Retail Pharmacy segment is shown below.

The company initially set out as a retail pharmacy but over time has made a slew of acquisitions that have helped it establish itself into the drug plan management and other services as shown below:

Pharmacy Benefit Segment

CVS Health’s PBM segment, managed under the name CVS Caremark offers a host of PBM services including plan design and administration, formulary management, Medicare Part D services, mail order, specialty pharmacy and infusion services, retail pharmacy network management services, prescription management systems, clinical services, disease management services and medical spend management4.

The PBM’s clients include individuals but the primary clients are employers, insurance companies, unions, government employee groups, health plans, Managed Medicaid plans and other sponsors of health benefit plans throughout the United States4. As a PBM, it manages the dispensing of pharmaceuticals through mail order pharmacies, specialty pharmacies and national network of more than 68,000 retail pharmacies. Additionally, the PBM segment includes SilverScript Insurance Company, which is a national provider of drug benefits to eligible beneficiaries under the federal government’s Medicare Part D program4.

56%44%

2014 REVENUES

PBM Retail Pharmacy

Source: CVS 10-K

Source: Wall Street Journal

Page 3

The growth drivers for this segment are the company’s ability to win new clients, continue to expand service offerings and also retention of the company’s existing clients. As noted by management in the recent earnings call, CVS’s PBM unit checks all of the above boxes with $11B in net new client business year to date as well as a 96% retention rate overall and 60% of clients approved for extensions as of June 20154.

The company also sees the Generic Drug market as a great opportunity and has established a joint venture with Cardinal Health called Red Oak Sourcing Inc. to negotiate with generic drug manufacturers, which we discuss in detail later in the report5.

Overall, the increasing health care coverage leaves the PBM segment in a position of strength and with the company’s host of PBM services and its current track record, we believe that it will extend into the near future. We model 11.5% growth for the PBM segment in 2015 in line with management’s guidance on the Q2 earnings call6 and growth rate of 12% beyond that. While management has indicated its desire to grow through acquisitions our model growth rates are primarily organic company growth.

Retail Pharmacy Segment

The company’s Retail Pharmacy Segment sells prescription drugs and a wide assortment of general merchandise, including over-the-counter drugs, beauty products and cosmetics among others4. Retail Pharmacy Segment derives the majority of its revenues through the sale of prescription drugs dispensed through its retail pharmacists4.

While margins continue to be thin in the retail segment at 3.1% against an industry average of 2.71%, CVS has seen strong growth in the increase in volume of the prescriptions and has outperformed both the retail market and other chain drug stores as shown in the infographic below3. During the same time the company has also managed to lower the labor cost to fill each prescription by 12%3.

The growth in prescriptions, in our opinion is primarily because of CVS’s minute clinics and over 24,000 pharmacists that are able to prescribe a wide variety of over-the-counter drugs right away.

The retail segment however faces headwinds in the form of generic drugs which affect margins negatively with nearly 85% of prescriptions filled year to date falling in this category up from ~81% for last year.

As is evident from the chart above, the firm’s front store sales has been steadily declining. Management had pointed out that the removal of tobacco products alone has contributed to 350 bps dip in its front store sales4. But we think CVS’s move to remove tobacco products is a solid long term move as we believe in the long term, profits from a true health care company are much more than selling tobacco products.

The Pharmacy segment revenue growth slowed down because of the increasing rate of generic dispensing and also because of the increasing number of generic versions

-4%-2%0%2%4%6%8%

2 0 1 2 2 0 1 3 2 0 1 4

Y/Y NET REVENUE CHANGE (%)

Total Pharmacy Front Store

Source: CVS presentation in Jefferies Retail Conference 20143

Source: CVS 2014 10-K

Page 4

of Brand name drugs that have been launched since 20124 which have impacted revenues to the tune of 160 bps in 2014. There have also been no significant new Brand name drugs that have been introduced within this time which has also led to a slowing down of the revenue growth.

Pharmacy same store sales were negatively impacted by the internal transition of the Specialty Connect to the PBM’s mail order pharmacies. Additionally, management noted that a lesser than severe flu outbreak and less severe winter compared to 20134 had an overall negative effect on the sales.

Going forward, we believe front store growth to be within the 4% to 5% y/y growth rate given management’s recent guidance on expanding healthy snack food options and elevated beauty programs in stores in 2016.

The CVS Extracare card and the mobile app continue to be strong drivers of profitable store growth with redeemed savings totaled $4B (~6% of 2014 retail pharmacy revenues) on a 12 month rolling basis. With just 10 million app downloads (against ~930 million total prescriptions filled in the retail pharmacy segment annually) as well, we think there is some significant penetration and growth that can be achieved.

We also think the company’s recent successful implementation of the EPIC EHR (electronic health record) bodes well for future expansion of services as it enables the CVS MinuteClinics to interact with major health systems across the US and provides access to patients with both minor and chronic conditions6.

RECENT DEVELOPMENTS

CVS acquires Omnicare for $12.7 Billion

In May 2015, CVS agreed to buy Omnicare Inc., (which is the largest provider of prescription drugs to nursing homes and other housing facilities for elderly and disabled people) for a total deal worth $12.7 Billion. We think this deal gives CVS better negotiating power with drug manufacturers and complements its specialty business with additional capabilities. Additionally it helps CVS to take advantage of two of the biggest long term trends in health care: an aging population and the development of expensive drugs for relatively rare ailments. Also we think with the acquisition is a sign of strength from CVS as it puts to use its strong cash balances and we believe that acquisitions like this might be a long term option for growth.

CVS acquires Target Pharmacy

In June 2015, CVS announced the acquisition of Target’s pharmacies and clinics for $1.9 Billion, where the nearly 1700 drug stores inside Target locations will be rebranded as CVS/pharmacy and the clinics changed to CVS’s MinuteClinic8. Under the terms of the deal, CVS will pay $98 a share in cash for Omnicare and assume $2.3 billion in debt. We model the deal to be accretive to earnings and cash flow at $0.20/share to EPS. While this move might seem unusual as both of the companies have been competitors and are now in effect facilitating a cross sell of each other’s products, we think it is in line with CVS’s long time shift to establish itself as leading health care company and its ability to reach customers irrespective of the channel. Also we think the deal helps CVS gain a foothold in Pacific Northwest and the Midwest from a PBM point of view. There is also little store overlap and hence should not cannibalize revenues from other CVS stores. We model this into our assumptions with an increase in the retail segment growth post 2016 from 4.5% to 4.8%.

CVS and Cardinal establish Red Oak

In July 2014, CVS and Cardinal Health announced a 50/50 joint venture called Red Oak Sourcing LLC, the largest US entity that negotiates prices with generic drug manufacturers5. Under the deal Cardinal will make $25 Million payments every quarter for 10 years to CVS Health and additional predetermined quarterly payments if certain milestones are met in terms of sourcing contracts.

-4%-2%0%2%4%6%8%

2 0 1 2 2 0 1 3 2 0 1 4

Y/Y SAME STORE SALES (%)

Total Pharmacy Front Store

Source: CVS 2014 10-K

Page 5

This recognizes CVS’s greater relative purchasing leverage and leaves the company to generate incremental value to the generic procurement created by both the companies’ combined purchasing volumes9. Under the deal, both companies will transferred workers to Red Oak. As of January 2015, manufacturers representing 95% of total generic drug sales had moved to Red Oak instead of dealing directly with Cardinal or CVS9. We think the deal makes great financial sense as CVS looks to squeeze basis points of profits from the generic drug sales, given that nearly 83% of all its prescriptions were for generic drugs. This also helps it capitalize on the increasing number of brand name drugs that go off patent with a current branded sales value of $40Billion4.

CVS announces solid Q2 earnings

CVS announced its Q2 earnings in July 2015, where it beat the estimates for a 5th straight quarter primarily from higher pharmacy claims and strong specialty sales10 earning $1.22 per share and a $0.35 dividend at a 28% dividend payout ratio. The company also announced the issuance of senior notes for $15 billion with well laddered tranches and no single year with a large amount of debt maturing6. This has been in keeping with the 2014 modification to the LT debt structure as shown below, where the company took advantage of the low interest rates. The proceeds will be used to fund both of the acquisitions that were discussed earlier in this report. The debt issue significantly changes its debt-to-EBITDA to ~3.2x, but management assured that it was committed to reducing it to its long term target of 2.7x6. With the cash on hand and its significant cash generating potential that we have modelled, we believe this is achievable in the medium term.

INDUSTRY TRENDS

Patent Cliff

The much talked about patent cliff is expected to continue through 2015, with several brand-name drugs nearing the end of their patent lives11. However, the trend itself is on the wane with fewer blockbuster drugs expected to go generic than in the past11. The main issue with selling generic drugs in the place of brand name drugs for CVS’s retail pharmacy segment is the steep drop in profit margins which on average is around $10,000 for the average substitution of a brand name drug with a generic one11. On the PBM side, the company actually benefits from delivering lower cost plans, but this we believe will also likely put more pressure to further cut costs and pass on savings to the consumers11. This we believe will come about because of the increased compliance and oversight of PBMs which will not only require them to spend more on compliance but also require them to disclose more information and become more transparency. We have not modelled too much of the increase in the PBM revenues because of this, as we believe that with generic drugs, the PBMs will be able to benefit from greater volumes and lower procurement costs, the slowdown of the patent cliff and also the increased compliance costs.

Continued Industry Consolidation

We see the current trend of industry consolidation to continue both on the Pharmacy and the PBM side. On the PBM side we think PBMs would need to consolidate to gain greater negotiating leverage to counter costs arising out of increased compliance costs and relatively lower number of

Source: CVS Analyst Day 2014 presentation

Source: CVS Analyst Day 2014 presentation

Page 6

generic drugs entering the market. On the retail pharmacy side, higher generic volumes will force the already competitive landscape to merge and consolidate in order to generate profitability from economies of scale. Additionally a bigger sized retail pharmacy would have better negotiating leverage with PBMs. We believe that in this regard, CVS stands to benefit on both the PBM and the Retail Pharmacy side as it is able to fill a lot of its prescriptions from the PBM drug plans through its own retail pharmacies. This synergy between the two operating units is, in our opinion, one of the biggest strengths for CVS going forward. This is something that the Management recognizes and has consistently and actively tried to extract as evidenced by the growing number of CVS Caremark claims filled in the retail network. We expect this trend to grow and strengthen with time.

MARKETS AND COMPETITION

As discussed elsewhere in this report CVS operates in the PBM as well as the retail pharmacy segment.

PBM

PBMs are external administrators of government and employer sponsored prescription drug programs that process and pay prescription drug claims12. This is a highly concentrated industry with the top 4 PBMs accounting for more than two thirds of the revenue in 201512.

The major players in this segment are shown below with CVS just marginally behind the biggest player in this industry, Express Scripts.

One of the key success factors within the industry is to have well developed internal processes for accurate

prescription and distribution of drugs combined with the economies of scale that help firms secure better prices on prescription drugs12. We are confident that CVS’s economies of scale combined with its own retail pharmacy arm to fill a majority of the prescription drugs make it a better model than the largest player Express Scripts pharmacy network as there are significant synergies to benefit from and also significant cost reductions that can be transferred in part to its customers.

Additionally given the recent Red Oak Sourcing venture, which we have discussed earlier, CVS has the largest sourcing entity for the generic drug market and hence can achieve the best negotiating power with these generic drug manufacturers compared to its competitors.

Retail Pharmacy

On the retail side, CVS operates drug stores in 42 states, more than 971 retail clinics under the MinuteClinic name11 that sells prescription drugs and general merchandise.

The major players in this area are CVS and Walgreens who control close to 90% of the market share. Despite the high level of concentration, none of these firms have control over pricing, distribution or customer loyalty11. Large players however still have favorable supply contracts with distributors that enable them to have better profitability than smaller stores.

Location and having trained staff that are able to provide expert advice on ailments and products are both help in differentiation and overcoming competition11. On both counts, CVS has been doing well in our opinion with the recent Target acquisition that puts it in shopping malls that

Express Scripts

28%

CVS27%

UnitedHealth Group10%

Catamaran7%

Others28%

2015 PBM MARKET SHARE

Source: CVS Analyst Day 2014 presentation

Source: IBISWORLD

Page 7

helps it with the location and its trained pharmacists that offer technical advice.

We also view CVS’s focus on developing the mobile app that helps users to refill prescriptions easily as great step to not only complement sales but also gather data on potential drug sales over time.

Peer Comparisons

We include a wide cross section of companies in a peer comparison for CVS i.e. companies on both the PBM side and the Retail Pharmacy side.

A look at the trailing and forward P/E ratios shows us that CVS comes of above average and maybe slightly overvalued. But we would like to point to the company’s below average Price to Cash flows that point to the extremely good cash generation capabilities of CVS.

Another positive aspect is the below average Debt to Equity which shows that the firm has financial flexibility compared to its peers to make acquisitions.

We also view the net margins that CVS is able to generate as a positive even though this is below Walgreens its nearest Pharmacy competitor. This is because CVS’s major revenues are from the PBM side and also Express Scripts,

its main competitor on the PBM side has a significantly lower net margin. Overall CVS is above the industry and peer average as well and with recent management commentary to increase margins, we view this favorably4.

Overall, we believe CVS is best positioned to make major gains given its unique business model and also its low Debt to Equity ratio which it expects to reduce even further over the medium term.

ECONOMIC OUTLOOK

Growing Health Insurance rates

The healthcare reform has seen people with insurance increase with private insurance rates expected to increasing steadily at around 2% y/y11. As private health insurance increases, more individuals are able to afford their medications, thus positively affecting the overall industry revenue in general. This in combination with the aging demographic is expected to continue to utilization for both the PBM business and the retail pharmacy segment. Our view is that the growing health insurance rates might give managed care organizations more leverage to negotiate lower drug reimbursement rates and this might affect some of CVS’s smaller competitors more than CVS itself. The chart below shows growth in insurance rates:

Per Capita Drug Expenditures to increase

The Centers for Medicare and Medicaid Services updated its national projections for health expenses with per capita spending rising for drugs at 5.5% in 2014 as shown in the chart below. The primary drivers of this growth rate were the introduction of new specialty drugs and also higher

CVS58%

Walgreens31%

Rite Aid10%

Others1%

2015 MARKET SHARE

Source: CVS Analyst Day 2014 presentation

Source: IBISWORLD

Source: Thomson Reuters

Page 8

insurance rates as discussed earlier. The growing economic condition with a net increase in consumer disposable income will also encourage higher utilization. CVS for its part has tried to increase adherence rates with Pharmacists providing counselling and EHR notification of patient non-adherence. This is already evidenced by the best in-class adherence results (for Diabetes, Cholesterol and Blood pressure) that CVS has seen over other Retail pharmacists9. Thus we believe that with such adherence mechanisms in place CVS will be able to capitalize on this trend better than its competitors. Better adherence will help them pass on the cost savings to their clients from reduced future chances of recurrence of illness.

CATALYSTS FOR GROWTH

We believe that CVS’s core strength is its unique operating model of both having a PBM and a pharmacy chain segment.

Any competitor that is able to drive better prices either through better negotiating leverage or better network through acquisitions will likely be a threat to CVS or even a reaction to a slowdown in growth in the industry

INVESTMENT POSITIVES

• CVS leads the market share in both segments in which it operates and with its unique integrated suite of pharmacy services, there will be increased cross selling.

• Strong cash balances that provide flexibility for acquisitions and a solid dividend payout ratio that is expected to grow to 35% by 2016.

• Company set to capitalize several LT trends such as the aging demographic and the increasing health expenditures per capita.

• Healthcare reform and rising specialty drug introductions are other tailwinds.

INVESTMENT NEGATIVES

• CVS’s debt is rated at BBB+ and while management intends to keep it that way, any additional debt might pose a threat to this rating.

• The retail segment is expected to grow on par with the economy and unless the company is able to provide a product mix of high margin products, that trend is likely to stay.

• Increasing Generic drugs in the place of brand name drugs is continuously driving the margins down and is likely expected to stay that way.

VALUATION

For CVS, we use a 5 year beta of 0.97 as we believe that the company’s corporate structure has been fairly constant over the past 5 years. We calculate a WACC of 6.57% for CVS based on the above stock beta. We model a continuing value growth rate of 3.5% at slightly above the consensus GDP estimates.

Model Assumptions:

We model a 11.5% growth for PBM in 2016 and 2017 before using a 12% for later years in view of the Omnicare acquisition gains to kick in

We model a 3.25% growth rate for Retail Pharmacy and a 4% growth rate beyond that due to gains from the Target acquisition.

We model a COGS at 81.3% of sales based on 2014 COGS. We decided against a 5 year average as we believe the company’s operations have changed considerably over the past 5 years.

We model SG&A at 11% of sales in line, slightly above 10.5% as we think the Target Pharmacies’ acquisition might increase this figure.

Per Capita Drug Spending

Page 9

We maintain a steady interest expense of 0.4% of sales in line with a 5 year average of interest expense.

PPE is increased at 6.85% of gross value in line with the historical average.

We model Notes payable at 16% of total non-cash assets keeping in line with the company’s existing corporate structure.

Model Results

We price CVS’s shares at $103 to $107, primarily from our DCF model which we believe to be the most accurate indicator. This is because it has factored in management’s latest guidance as well as management’s guidance on profit forecasts going forward.

Our DDM gives us a price of $97 which is lower than our target price. We are wary of the DDM target price as we believe CVS’s current dividend payout policy is unsustainable in case of a slowdown in sales.

Our Relative PE model gives us a share price of $99. This is also lower than our target price as CVS has a higher than average PE compared to its industry peers. This also validates our HOLD decision in that despite having some considerable competitive advantages over its peers CVS does not yet represent an attractive buying opportunity.

KEYS TO MONITOR

Some of the keys to monitor for CVS going forward would be:

The generic prescriptions filled as a percent of all total prescriptions filled. If CVS’s retail segment is able to provide significant brand name product sales in addition to the sales mix, we would re-evaluate the future growth assumptions.

The client retention rate as well as the service offerings as part of its PBM business. Any decrease in retention rate will surely lead us to model lower long term growth potentials for the company.

Any additional debt issued by the company would also cause us to re-evaluate our WACC calculations in addition to our free cash flow assumptions. While we believe the company has laddered its debt maturities well, any further debt issue might lead a credit downgrade from its current BBB+.

REFERENCES

1. Yahoo Finance

2. S&P : Net Advantage

3. Jefferies Health Care Conference 2015

4. CVS Annual Report 2014:

http://investors.cvshealth.com/~/media/Files/C/

CVS-IR/reports/cvs-ar-2014.pdf

5. Cardinal Health raises profit forecast amid fast

start for CVS generics venture:

http://www.bizjournals.com/columbus/news/20

15/01/29/cardinal-health-raises-profit-forecast-

amid-fast.html

6. CVS Health (CVS) Larry J. Merlo on Q2 2015

Results - Earnings Call Transcript:

http://seekingalpha.com/article/3397165-cvs-

health-cvs-larry-j-merlo-on-q2-2015-results-

earnings-call-transcript?part=single

7. CVS to Buy Drug Provider for $10.4 Billion:

http://www.wsj.com/articles/cvs-to-buy-

omnicare-for-12-7-billion-1432207124

8. CVS to Buy Target’s Pharmacy Business for $1.9

Billion

http://www.wsj.com/articles/cvs-to-buy-targets-

pharmacy-business-for-1-9-billion-1434367874

9. CVS Health Analyst Day 2014:

http://investors.cvshealth.com/~/media/Files/C/

CVS-IR-v3/documents/16-12-2014/analyst-day-

full-presentation.pdf

10. CVS profit beats estimates on higher pharmacy

sales, claims:

http://finance.yahoo.com/news/cvs-profit-beats-

estimates-higher-121825916.html

11. IBIS World: Pharmacies and drug stores in the US

12. IBIS World: Pharmacy Benefit Management

Industry

IMPORTANT DISCLAIMER

Henry Fund reports are created by student enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa’s Tippie School of Management. These reports are intended to provide potential employers and other interested parties an example of the analytical

Page 10

skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.

$103.40 0.7 0.75 0.8 0.85 0.9 0.95 1 1.05

2.00% 75.96 75.96 75.96 75.96 75.96 75.96 75.96 75.96

2.25% 79.22 79.22 79.22 79.22 79.22 79.22 79.22 79.22

2.50% 82.87 82.87 82.87 82.87 82.87 82.87 82.87 82.87

3.00% 91.70 91.70 91.70 91.70 91.70 91.70 91.70 91.70

3.25% 97.11 97.11 97.11 97.11 97.11 97.11 97.11 97.11

3.50% 103.40 103.40 103.40 103.40 103.40 103.40 103.40 103.40

3.75% 110.81 110.81 110.81 110.81 110.81 110.81 110.81 110.81

4.00% 119.66 119.66 119.66 119.66 119.66 119.66 119.66 119.66

$103.40 0.7 0.75 0.8 0.85 0.9 0.95 1 1.05

1.80% 121.36 121.36 121.36 121.36 121.36 121.36 121.36 121.36

2.00% 111.81 111.81 111.81 111.81 111.81 111.81 111.81 111.81

2.20% 103.40 103.40 103.40 103.40 103.40 103.40 103.40 103.40

2.40% 95.95 95.95 95.95 95.95 95.95 95.95 95.95 95.95

2.60% 89.30 89.30 89.30 89.30 89.30 89.30 89.30 89.30

2.80% 83.32 83.32 83.32 83.32 83.32 83.32 83.32 83.32

3.00% 77.92 77.92 77.92 77.92 77.92 77.92 77.92 77.92

3.20% 73.02 73.02 73.02 73.02 73.02 73.02 73.02 73.02

$103.40 5.50% 6.00% 6.50% 7.00% 7.50% 8.00% 8.50% 9.00%

7.00% 95.62 97.15 98.72 100.32 101.97 103.65 105.37 107.12

8.00% 96.51 98.04 99.61 101.22 102.86 104.54 106.26 108.02

9.00% 97.40 98.93 100.50 102.11 103.75 105.43 107.15 108.91

10.00% 98.29 99.83 101.39 103.00 104.64 106.32 108.04 109.80

11.00% 99.19 100.72 102.29 103.89 105.53 107.21 108.93 110.69

12.00% 100.08 101.61 103.18 104.78 106.42 108.10 109.82 111.58

13.00% 100.97 102.50 104.07 105.67 107.32 109.00 110.72 112.47

14.00% 101.86 103.39 104.96 106.56 108.21 109.89 111.61 113.37

SG&A

PPE Growth

CV Growth Rate

Beta

Risk Free Rate

Beta

CVS HealthRevenue Decomposition

All figures in USD Millions

Fiscal Years Ending Dec. 31 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Product Segment Revenue Breakdown

Pharmacy Service Segment 58,874 73,444 76,208 88,440 93,746 99,371 105,830 112,709 120,035

Retail Pharmacy Segment 59,599 63,654 65,618 67,798 70,510 73,330 76,264 79,314 82,487

Intersegment Eliminations (11,373) (13,965) (15,065) (16,871) (18,558) (20,414) (22,455) (24,925) (27,667)

Total Sales 107,100 123,133 126,761 139,367 145,698 152,288 159,639 167,098 174,855

Segment Growth

Pharmacy Service Segment 25% 4% 16% 12% 12% 12% 12% 12%

Retail Pharmacy Segment 7% 3% 3% 3% 3% 4% 4% 4%

Intersegment Eliminations 23% 8% 12% 10% 10% 10% 11% 11%

Total Sales 15.0% 2.9% 9.9% 4.5% 4.5% 4.8% 4.7% 4.6%

CVS HealthCommon Size Balance Sheet

Fiscal Years Ending Dec. 31 2011 2012 2013 2014 2015 2016 2017 2018 2019

Cash and cash equivalents 1.32% 1.12% 3.23% 1.78% 3.54% 6.01% 8.68% 11.24% 13.69%

Short-term investments 0.00% 0.00% 0.07% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02%

Accounts receivable, net 5.65% 5.26% 6.89% 6.95% 6.20% 6.20% 6.20% 6.20% 6.20%

Inventories 9.38% 8.96% 8.71% 8.56% 8.90% 8.90% 8.90% 8.90% 8.90%

Deferred income taxes 0.47% 0.56% 0.71% 0.71% 0.74% 0.77% 0.80% 0.83% 0.87%

Other current assets 0.54% 0.47% 0.37% 0.62% 0.50% 0.50% 0.50% 0.50% 0.50%

Total current assets 17.36% 16.38% 19.98% 18.64% 19.90% 22.40% 25.10% 27.69% 30.17%

Property and equipment, Gross 14.38% 13.24% 13.73% 13.48% 13.78% 14.08% 14.36% 14.65% 14.96%

Accumulated Depreciation -6.47% -6.23% -6.94% -7.13% -8.27% -9.39% -10.47% -11.54% -12.60%

Property and equipment, Net 7.91% 7.01% 6.80% 6.35% 5.51% 4.69% 3.89% 3.12% 2.37%

Goodwill 24.71% 21.44% 20.94% 20.19% 19.32% 18.48% 17.63% 16.84% 16.09%

Intangible assets, net 9.22% 7.92% 7.52% 7.01% 6.71% 6.42% 6.12% 5.85% 5.59%

Deferred income taxes 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Other assets 1.08% 1.04% 1.20% 1.08% 1.04% 0.99% 0.95% 0.90% 0.86%

Total assets 60.28% 53.79% 56.43% 53.28% 52.46% 52.99% 53.69% 54.40% 55.09%

Accounts payable 4.08% 4.12% 4.38% 4.70% 4.30% 4.30% 4.30% 4.30% 4.30%

Claims and discounts payable 3.26% 3.23% 3.59% 3.88% 3.50% 3.50% 3.50% 3.50% 3.50%

Accrued expenses 3.08% 3.58% 3.76% 4.17% 3.63% 3.63% 3.63% 3.63% 3.63%

Short-term debt 0.70% 0.56% 0.00% 0.49% 0.47% 0.45% 0.43% 0.41% 0.39%

Current portion of long-term debt 0.05% 0.00% 0.44% 0.41% 0.33% 0.00% 0.00% 0.00% 0.00%

Total current liabilities 11.17% 11.49% 12.17% 13.65% 12.23% 11.88% 11.86% 11.84% 11.82%

Long-term debt 8.60% 7.42% 10.13% 8.39% 7.66% 7.36% 7.05% 6.76% 6.49%

Deferred income taxes 3.60% 3.07% 3.08% 2.90% 2.81% 2.74% 2.65% 2.57% 2.50%

Other long-term liabilities 1.35% 1.22% 1.12% 1.10% 1.20% 1.20% 1.20% 1.20% 1.20%

Redeemable noncontrolling interest 0.03% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Total liabilities 24.71% 23.20% 26.50% 26.04% 23.91% 23.17% 22.76% 22.38% 22.01%

Total shareholders’ equity 35.54% 30.58% 29.93% 27.24% 26.06% 24.93% 23.78% 22.72% 21.71%

Total CVS Health shareholders’ equity 35.54% 30.58% 29.93% 27.24% 26.05% 24.93% 23.78% 22.72% 21.71%

Common stock 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01%

Treasury stock, at cost -11.16% -13.21% -15.91% -17.28% -16.53% -15.81% -15.08% -14.41% -13.77%

Shares held in trust -0.05% -0.03% -0.02% -0.02% -0.02% -0.02% -0.02% -0.02% -0.02%

Guaranteed ESOP obligation 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Capital surplus 26.27% 23.65% 23.49% 21.83% 20.88% 19.97% 19.05% 18.20% 17.40%

Retained earnings 20.63% 20.30% 22.48% 22.85% 24.36% 25.80% 27.10% 28.37% 29.59%

Accumulated other comprehensive income / loss -0.16% -0.15% -0.12% -0.16% -0.15% -0.14% -0.14% -0.13% -0.12%

Noncontrolling interest 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Total liabilities and shareholders’ equity 60.28% 53.79% 56.43% 53.28% 52.46% 52.99% 53.69% 54.40% 55.09%

CVS HealthCommon Size Income Statement

Fiscal Years Ending Dec. 31 2011 2012 2013 2014 2015 2016 2017 2018 2019

Net revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Cost of revenues (excluding D&A) -79.33% -80.31% -79.76% -80.41% -81.30% -81.30% -81.30% -81.30% -81.30%

Gross profit 19.20% 18.27% 18.76% 18.20% 18.70% 18.70% 18.70% 18.70% 18.70%

Selling, general and administrative expenses -11.83% -10.99% -10.95% -10.50% -11.00% -11.00% -11.00% -11.00% -11.00%

Depreciation and amortization -1.46% -1.42% -1.48% -1.39% -1.45% -1.48% -1.51% -1.54% -1.57%

Operating profit 5.91% 5.86% 6.34% 6.31% 6.25% 6.22% 6.19% 6.16% 6.13%

Interest expense, net -0.55% -0.45% -0.40% -0.43% -0.41% -0.40% -0.38% -0.37% -0.35%

Loss on early extinguishment of debt 0.00% -0.28% 0.00% -0.37% 0.00% 0.00% 0.00% 0.00% 0.00%

Income before income tax provision 5.37% 5.12% 5.94% 5.51% 5.84% 5.82% 5.81% 5.80% 5.78%

Income tax provision -2.11% -1.98% -2.31% -2.18% -2.38% -2.38% -2.37% -2.36% -2.36%

Income from continuing operations 3.26% 3.14% 3.63% 3.33% 3.46% 3.45% 3.44% 3.43% 3.42%

Income / loss from discontinued operations, net of tax / benefit -0.03% -0.01% -0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Net income 3.23% 3.14% 3.62% 3.33% 3.46% 3.45% 3.44% 3.43% 3.42%

CVS HealthIncome StatementAll figures in USD Millions 41.80% 40.60% 40.00%

Fiscal Years Ending Dec. 31 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Net revenues 107,080 123,120 126,761 139,367 145,698 152,288 159,639 167,098 174,855

Cost of revenues (excluding D&A) (84,950) (98,879) (101,108) (112,069) (118,453) (123,810) (129,786) (135,851) (142,157)

Gross profit 20,562 22,488 23,783 25,367 27,246 28,478 29,852 31,247 32,698

Selling, general and administrative expenses (12,663) (13,525) (13,876) (14,637) (16,027) (16,752) (17,560) (18,381) (19,234)

Depreciation and amortization (1,568) (1,753) (1,870) (1,931) (2,108) (2,252) (2,406) (2,571) (2,747)

Operating profit 6,331 7,210 8,037 8,799 9,111 9,474 9,886 10,295 10,717

Interest expense, net (584) (557) (509) (600) (603) (605) (608) (610) (612)

Loss on early extinguishment of debt - (348) - (521) - - - - -

Income before income tax provision 5,747 6,305 7,528 7,678 8,508 8,869 9,278 9,685 10,104

Income tax provision (2,258) (2,436) (2,928) (3,033) (3,471) (3,619) (3,785) (3,952) (4,123)

Income from continuing operations 3,489 3,869 4,600 4,645 5,037 5,251 5,493 5,734 5,982

Income / loss from discontinued operations, net of tax / benefit (31) (7) (8) (1) - - - - -

Net income 3,458 3,862 4,592 4,644 5,037 5,251 5,493 5,734 5,982

Net loss attributable to noncontrolling interest 4 2 - - - - - - -

Preference dividends, net of income tax benefit - - - - - - - - -

Net income attributable to CVS Health 3,462 3,864 4,592 4,644 5,037 5,251 5,493 5,734 5,982

CVS HealthCash Flow StatementAll figures in USD MillionsFiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E

Net income (loss) 5037 5251 5493 5734 5982

Adjustments

Depreciation & Amortization 2,108 2,252 2,406 2,571 2,747

Change in deferred income tax assets (89) (97) (105) (115) (125)

Change in Accounts & other current receivables, net 654 (409) (456) (462) (481)

Change in Inventories (1,037) (586) (654) (664) (690)

Change in prepaid expenses & other current assets 138 (33) (37) (37) (39)

Change in Accounts payable, trade (282) 283 316 321 334

Change in discounts payable (305) 231 257 261 271

Change in Deferred tax Liabilities 65 66 67 68 69

Change in Accrued Revenues (527) 239 267 271 282

Change in Other Assets - - - - -

Net cash flows from operating activities 5761 7197 7554 7947 8349

Capital expenditures (1,287) (1,375) (1,469) (1,570) (1,677)

Change in goodwill - - - - -

Change in other long-term assets - - - - -

Net cash flows from investing activities (1,287) (1,375) (1,469) (1,570) (1,677)

Change in total debt (622) (444) 50 44 42

Payment of dividends (1,395) (1,454) (1,521) (1,588) (1,656)

Proceeds from issuance of common stock - - - - -

Repurchases of common stock - - - - -

Change in total other LT liabilities 217 79 88 90 93

Change in Non controlling interests - - - - -

Net cash flows from financing activities (1,799) (1,819) (1,382) (1,454) (1,521)

Change in Cash 2,675 4,003 4,702 4,923 5,151

Cash at the Beginning of the year 2,481 5,156 9,158 13,861 18,784

Cash at the end of the year 5,156 9,158 13,861 18,784 23,935

CVS HealthBalance SheetAll figures in USD Millions

Fiscal Years Ending Dec. 31 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Cash and cash equivalents 1,413 1,375 4,089 2,481 5,156 9,158 13,861 18,784 23,935

Short-term investments 5 5 88 34 34 34 34 34 34

Accounts receivable, net 6,047 6,479 8,729 9,687 9,033 9,442 9,898 10,360 10,841

Inventories 10,046 11,032 11,045 11,930 12,967 13,554 14,208 14,872 15,562

Deferred income taxes 503 693 902 985 1,074 1,170 1,276 1,390 1,516

Other current assets 580 577 472 866 728 761 798 835 874

Total current assets 18,594 20,161 25,325 25,983 28,992 34,119 40,074 46,275 52,762

Property and equipment, Gross 15,400.0 16,306.0 17,408.0 18,786.0 20,073 21,448 22,917 24,487 26,164

Accumulated Depreciation (6,933) (7,674) (8,793) (9,943) (12,051) (14,303) (16,709) (19,280) (22,027)

Property and equipment, Net 8,467 8,632 8,615 8,843 8,022 7,145 6,208 5,207 4,137

Goodwill 26,458 26,395 26,542 28,142 28,142 28,142 28,142 28,142 28,142

Intangible assets, net 9,869 9,753 9,529 9,774 9,774 9,774 9,774 9,774 9,774

Deferred income taxes - - - - - - - - -

Other assets 1,155 1,280 1,515 1,510 1,510 1,510 1,510 1,510 1,510

Total assets 64,543 66,221 71,526 74,252 76,440 80,691 85,708 90,908 96,324

Accounts payable 4,370 5,070 5,548 6,547 6,265 6,548 6,864 7,185 7,519

Claims and discounts payable 3,487 3,974 4,548 5,404 5,099 5,330 5,587 5,848 6,120

Accrued expenses 3,293 4,411 4,768 5,816 5,289 5,528 5,795 6,066 6,347

Short-term debt 750 690 - 685 685 685 685 685 685

Current portion of long-term debt 56 5 561 575 484 - - - -

Total current liabilities 11,956 14,150 15,425 19,027 17,822 18,091 18,932 19,784 20,671

Long-term debt 9,208 9,133 12,841 11,695 11,164 11,204 11,254 11,298 11,341

Deferred income taxes 3,853 3,784 3,901 4,036 4,101 4,166 4,233 4,301 4,369

Other long-term liabilities 1,445 1,501 1,421 1,531 1,748 1,827 1,916 2,005 2,098

Redeemable noncontrolling interest 30 - - - - - - - -

Total liabilities 26,462 28,568 33,588 36,289 34,835 35,289 36,334 37,388 38,479

Total shareholders’ equity 38,051 37,653 37,938 37,963 37,963 37,963 37,963 37,963 37,963

Total CVS Health shareholders’ equity 38,051 37,653 37,938 37,958 37,958 37,958 37,958 37,958 37,958

Common stock 16 17 17 17 17 17 17 17 17

Treasury stock, at cost (11,953) (16,270) (20,169) (24,078) (24,078) (24,078) (24,078) (24,078) (24,078)

Shares held in trust (56) (31) (31) (31) (31) (31) (31) (31) (31)

Guaranteed ESOP obligation - - - - - - - - -

Capital surplus 28,126 29,120 29,777 30,418 30,418 30,418 30,418 30,418 30,418

Retained earnings 22,090 24,998 28,493 31,849 35,491 39,288 43,260 47,406 51,731

Accumulated other comprehensive income / loss (172) (181) (149) (217) (217) (217) (217) (217) (217)

Noncontrolling interest - - - 5 5 5 5 5 5

Total liabilities and shareholders’ equity 64,543 66,221 71,526 74,252 76,440 80,691 85,708 90,908 96,324

CVS HealthCash Flow StatementAll figures in USD Millions

Fiscal Years Ending Dec. 31 2011 2012 2013 2014

OPERATING ACTIVITIES

Income Before Extraordinary Items 3,488.00 3,882.00 4,600.00 4,645.00

Depreciation and Amortization 1,568.00 1,753.00 1,870.00 1,931.00

Extraordinary Items and Disc. Operations (84.00) (7.00) (8.00) (1.00)

Deferred Taxes 0.00 0.00 0.00 0.00

Equity in Net Loss (Earnings) 0.00 0.00 0.00 0.00

Sale of Property, Plant, and Equipment 0.00 0.00 0.00 0.00

and Sale of Investments - Loss (Gain) 0.00 0.00 0.00 0.00

Funds from Operations - Other 279.00 374.00 55.00 628.00

Receivables - Decrease (Increase) (748.00) (387.00) (2,210.00) (737.00)

Inventory - Decrease (Increase) 607.00 (858.00) 12.00 (770.00)

Accounts Payable and Accrued Liabs-Inc (Dec) 1,213.00 1,900.00 0.00 0.00

Income Taxes - Accrued - Inc (Dec) 0.00 0.00 0.00 0.00

Other Assets and Liabilities - Net Change (467.00) 14.00 1,464.00 2,441.00

Operating Activities - Net Cash Flow 5,856.00 6,671.00 5,783.00 8,137.00

INVESTING ACTIVITIES

Investments - Increase 0.00 0.00 0.00 0.00

Sale of Investments 60.00 0.00 0.00 0.00

Short-Term Investments - Change 0.00 0.00 (90.00) 4.00

Capital Expenditures (1,872.00) (2,030.00) (1,984.00) (2,136.00)

Sale of Property, Plant, and Equipment 596.00 552.00 600.00 515.00

Acquisitions 0.00 0.00 0.00 0.00

Investing Activities - Other (1,194.00) (371.00) (361.00) (2,428.00)

Investing Activities - Net Cash Flow (2,410.00) (1,849.00) (1,835.00) (4,045.00)

FINANCING ACTIVITIES

Sale of Common and Preferred Stock 431.00 836.00 500.00 421.00

Purchase of Common and Preferred Stock (3,001.00) (4,330.00) (3,976.00) (4,001.00)

Cash Dividends (674.00) (829.00) (1,097.00) (1,288.00)

Long-Term Debt - Issuance 1,463.00 1,239.00 3,964.00 1,483.00

Long-Term Debt - Reduction (2,122.00) (1,718.00) 0.00 (3,100.00)

Current Debt - Changes 450.00 (60.00) (690.00) 685.00

Financing Activities - Other (28.00) (26.00) 0.00 0.00

Financing Activities - Net Cash Flow (3,460.00) (4,860.00) (1,237.00) (5,694.00)

Exchange Rate Effect 0.00 0.00 3.00 (6.00)

Cash and Equivalents - Change (14.00) (38.00) 2,714.00 (1,608.00)

CVS HealthValue Driver EstimationAll figures in USD MillionsFiscal Years Ending Dec. 31 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Net Sales 107,080 123,120 126,761 139,367 145,698 152,288 159,639 167,098 174,855

Cost of Goods Sold (after Depreciation removed) (84,950) (98,879) (101,108) (112,069) (118,453) (123,810) (129,786) (135,851) (142,157)

Selling, General & Administrative Expenses (12,663) (13,525) (13,876) (14,637) (16,027) (16,752) (17,560) (18,381) (19,234)

Depreciation & Amortization 1,568 1,753 1,870 1,931 2,108 2,252 2,406 2,571 2,747

Add: Operating Lease Interest 812 816 803 811 811 811 811 811 811

Adjusted EBITA 11,847 13,285 14,450 15,403 14,138 14,790 15,510 16,249 17,022

Adjusted Taxes

Provision for Income Taxes (5,747) (6,305) (7,528) (7,678) (8,508) (8,869) (9,278) (9,685) (10,104)

Add: Tax Shield on Interest Expense 238 - - - - - - - -

Add: Tax Shield on Implied Lease Interest 331 333 327 331 331 331 331 331 331

Less: Tax Shield on Other Income (Loss) - - - - - - - - -

Total Adjusted Taxes (5,177) (5,972) (7,201) (7,347) (8,177) (8,538) (8,947) (9,354) (9,773)

Plus: Change in Deferred Tax Assets/Liabilities

Current Year Deferred Tax Assets 503 693 902 985 1,074 1,170 1,276 1,390 1,516

Current Year Deferred Tax Liabilities 3,853 3,784 3,901 4,036 4,101 4,166 4,233 4,301 4,369

Previous Year Deferred Tax Assets 511 503 693 902 985 1,074 1,170 1,276 1,390

Previous Year Deferred Tax Liabilities 3,655 3,853 3,784 3,901 4,036 4,101 4,166 4,233 4,301

Net Change in Deferred Taxes 206 (259) (92) 52 (24) (31) (39) (47) (56)

EBITA 11,847 13,285 14,450 15,403 14,138 14,790 15,510 16,249 17,022

Less: Total Adjusted Taxes (5,177) (5,972) (7,201) (7,347) (8,177) (8,538) (8,947) (9,354) (9,773)

Add: Change in Deferred Taxes 206 (259) (92) 52 (24) (31) (39) (47) (56)

NOPLAT 6,876 7,053 7,157 8,108 5,937 6,220 6,524 6,848 7,193

Invested Capital Computation

Operating Current Assets:

Normal Cash 930 1,008 1,266 1,299 1,450 1,706 2,004 2,314 2,638

Accounts Receivable, Net 6,047 6,479 8,729 9,687 9,033 9,442 9,898 10,360 10,841

Inventory 10,046 11,032 11,045 11,930 12,967 13,554 14,208 14,872 15,562

Prepaid Expenses & Operating Current Assets 580 577 472 866 728 761 798 835 874

Total Operating Current Assets 17,603 19,096 21,512 23,782 24,179 25,463 26,907 28,381 29,915

Operating Current Liabilities:

Accounts Payable 4,370 5,070 5,548 6,547 6,265 6,548 6,864 7,185 7,519

Accrued Revenue 3,293 4,411 4,768 5,816 5,289 5,528 5,795 6,066 6,347

Claims and Discounts payable 3,487 3,974 4,548 5,404 5,099 5,330 5,587 5,848 6,120

Other liabilities 750 690 - 685 685 685 685 685 685

Total Operating Current Liabilities 11,900 14,145 14,864 18,452 17,338 18,091 18,932 19,784 20,671

Net Operating Working Capital 5,703 4,951 6,648 5,330 6,840 7,371 7,976 8,597 9,245

Net PPE 8,467 8,632 8,615 8,843 8,022 7,145 6,208 5,207 4,137

Intangible assets, net 9,869 9,753 9,529 9,774 9,774 9,774 9,774 9,774 9,774

Other assets 1155 1280 1515 1510 1510 1510 1510 1510 1510

PV of Operating Leases 20,954 21,050 20,714 20,940 22,374 23,907 25,544 27,294 29,164

Other Operating LT Assets 31,978 32,083 31,758 32,224 33,658 35,191 36,828 38,578 40,448

Other long-term liabilities 1,445 1,501 1,421 1,531 1,748 1,827 1,916 2,005 2,098

Other Operating LT Liabilities 1,445 1,501 1,421 1,531 1,748 1,827 1,916 2,005 2,098

Invested Capital

Add: Net Operating Working Capital 5,703 4,951 6,648 5,330 6,840 7,371 7,976 8,597 9,245

Add: Net PPE 8,467 8,632 8,615 8,843 8,022 7,145 6,208 5,207 4,137

Add: Other Operating LT Assets 31,978 32,083 31,758 32,224 33,658 35,191 36,828 38,578 40,448

Less: Other Operating LT Liabilities (1,445) (1,501) (1,421) (1,531) (1,748) (1,827) (1,916) (2,005) (2,098)

Total Invested Capital 44,703 44,165 45,600 44,866 46,772 47,880 49,096 50,376 51,731

Return on Invested Capital

NOPLAT 6,876 7,053 7,157 8,108 5,937 6,220 6,524 6,848 7,193

/ Beginning Invested Capital 44,703 44,165 45,600 44,866 46,772 47,880 49,096 50,376

ROIC 15.8% 16.2% 17.8% 13.2% 13.3% 13.6% 13.9% 14.3%

Economic Profit

Beginning Invested Capital 44,703 44,165 45,600 44,866 46,772 47,880 49,096 50,376

ROIC 15.8% 16.2% 17.8% 13.2% 13.3% 13.6% 13.9% 14.3%

WACC 6.6% 6.6% 6.6% 6.6% 6.6% 6.6% 6.6% 6.6%

Economic Profit [Beg IC*(ROIC-WACC)] 4,114 4,253 5,110 2,987 3,145 3,376 3,620 3,881

FCF

NOPLAT 7,053 7,157 8,108 5,937 6,220 6,524 6,848 7,193

Add: Beg Invested Capital 44,703 44,165 45,600 44,866 46,772 47,880 49,096 50,376

Less: Current Invested Capital 44,165 45,600 44,866 46,772 47,880 49,096 50,376 51,731

FCF 7,591 5,722 8,843 4,030 5,113 5,308 5,568 5,839

Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012) Present Value of Operating Lease Obligations (2011) Present Value of Operating Lease Obligations (2010) Present Value of Operating Lease Obligations (2009)

Operating Operating Operating Operating Operating Operating

Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Leases Fiscal Years Ending Leases Fiscal Years Ending Leases Fiscal Years Ending Leases

2015 2279 2014 2175 2013 2261 2012 2230 2011 46 2010 47

2016 2220 2015 2129 2014 2048.5 2013 2039.5 2012 38 2011 45

2017 2121 2016 2055 2015 2048.5 2014 2039.5 2013 30 2012 35

2018 2007 2017 1964 2016 1901 2015 1843 2014 21 2013 26

2019 1861 2018 1853 2017 1901 2016 1843 2015 19 2014 21

Thereafter 16794 Thereafter 16914 Thereafter 17436 Thereafter 17630 Thereafter 57 Thereafter 70

Total Minimum Payments 27282 Total Minimum Payments 27090 Total Minimum Payments 27596 Total Minimum Payments 27625 Total Minimum Payments 211 Total Minimum Payments 244

Less: Interest 6342 Less: Interest 6376 Less: Interest 6546 Less: Interest 6671 Less: Interest 27 Less: Interest 33

PV of Minimum Payments 20940 PV of Minimum Payments 20714 PV of Minimum Payments 21050 PV of Minimum Payments 20954 PV of Minimum Payments 184 PV of Minimum Payments 211

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 3.88% Pre-Tax Cost of Debt 3.88% Pre-Tax Cost of Debt 3.88% Pre-Tax Cost of Debt 3.88% Pre-Tax Cost of Debt 3.88% Pre-Tax Cost of Debt 3.88%

Number Years Implied by Year 6 Payment 9.0 Number Years Implied by Year 6 Payment 9.1 Number Years Implied by Year 6 Payment 9.2 Number Years Implied by Year 6 Payment 9.6 Number Years Implied by Year 6 Payment 3.0 Number Years Implied by Year 6 Payment 3.3

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease

Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment

1 2279 2194.0 1 2175 2093.9 1 2261 2176.7 1 2230 2146.8 1 46 44.3 1 47 45.2

2 2220 2057.5 2 2129 1973.1 2 2048.5 1898.5 2 2039.5 1890.2 2 38 35.2 2 45 41.7

3 2121 1892.4 3 2055 1833.5 3 2048.5 1827.7 3 2039.5 1819.7 3 30 26.8 3 35 31.2

4 2007 1723.9 4 1964 1686.9 4 1901 1632.8 4 1843 1583.0 4 21 18.0 4 26 22.3

5 1861 1538.8 5 1853 1532.2 5 1901 1571.9 5 1843 1523.9 5 19 15.7 5 21 17.4

6 & beyond 1861 11533.1 6 & beyond 1853 11593.9 6 & beyond 1901 11942.3 6 & beyond 1843 11990.4 6 & beyond 19 43.7 6 & beyond 21 53.3

PV of Minimum Payments 20939.6 PV of Minimum Payments 20713.6 PV of Minimum Payments 21049.9 PV of Minimum Payments 20954.0 PV of Minimum Payments 183.7 PV of Minimum Payments 211.2

Marginal Tax Rate 40.80%

Cost of equity Calculation

Risk Free Rate 2.20% Link

+

Beta* 0.97

Market Risk Premium 4.85%

= Cost of Equity 6.90%

WACC Calculation All figures in millions

Shares outstanding* 1,522.000

MV of share $102.14

=Total MV of Equity [E] 155,457.08$

MV of debt [D] $13,100.00

Cost of Debt 4.50% Link

MV of equity 155,457.08$

+

MV of debt 13,100.00$

= MV of the firm [V] 168,557.08$

Cost of Equity * 6.90%

(E/V) 92.23%

+

Cost of Debt * 4.50%

(1-Marginal tax Rate) 59.20%

(D/V) 7.77%

= WACC 6.57%

YTM on bonds that mature in 2041

Weighted Average Cost of Capital (WACC) Estimation

CVS Health

(30Y Treasury Yield from Treasury Website)

Key Inputs:

CV Growth 3.50%

CV ROIC 14.28%

WACC 6.57%

Cost of Equity 6.90%

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E

DCF Model

Discount period 1 2 3 4 5

NOPLAT 5937 6220 6524 6848 7193

Continuing Value 176,592

PV of Continuing Value 136,884

Free Cash Flow 4030 5113 5308 5568 5839

PV of free cash flows 3782 4501 4385 4316

Value of Operations 153867

Non Operating Assets

ST Investments 34

Excess Cash 3706

Value of Non Operating Assets 3740

Non Operating Liabilities

PV of Operating Leases 22374

Total Debt 11164

PV of Pension Obligations

PV of employee stock options 3190

Value of Non Operating Liabilities 36728

Equity Value 120880

Shares outstanding 1169

Intrinsic Share Price 103.40

EP Model

Periods to discount 1 2 3 4 5

Economic Profit 2987 3145 3376 3620 3881

PV of Terminal Year EP 59027

PV of Incremental Reinvested EP 67189

Continuing Value 126216

PV of continuing value 97835

PV of Economic Profit 2802 2769 2789 2806

Initial Invested Capital 46772

Value of Operations 155774

Non Operating Assets

Excess Cash 26813

Value of Non Operating Assets 26813

Non Operating Liabilities

PV of Operating Leases 22374

Total Debt 0

PV of Pension Obligations 0

PV of employee stock options 1487

Value of Non Operating Liabilities 23861

Equity Value 120880

Shares outstanding 1169

Intrinsic Share Price 103.40

Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

CVS Health

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E

Periods of Discount 1 2 3 4 5

EPS 4.31$ 4.49$ 4.70$ 4.90$ 5.12$

Key Assumptions

CV growth 3.50%

CV ROE 15.76%

Net Income 5982

Average Sharholders' equity 37958

Cost of Equity 6.90%

Future Cash Flows

P/E Multiple (CV Year) 22.85

EPS (CV Year) 5.12$

Future Stock Price 116.92$

Dividends per share 1.19$ 1.24$ 1.30$ 1.36$

Future Cash Flows 116.92$

Discounted Cash Flows 1.12$ 1.09$ 1.07$ 1.05$ 85.04$

89.38$

Intrinsic Value EOY 91.98$

Price Today 97.58$

Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

CVS Health

EPS EPSCompany Price 2015E 2016E P/E 15 P/E 16

CVS HEALTH CORPORATION 101.52$ $5.15 $6.00 19.70 16.91

CIGNA CORPORATION 139.62$ $8.61 $9.46 16.22 14.76

WALGREENS BOOTS ALLIANCE, INC. 90.40$ $3.80 $4.54 23.79 19.89

EXPRESS SCRIPTS HOLDING COMPANY 84.49$ $5.50 $6.06 15.35 13.94

AMERISOURCEBERGEN CORPORATION 104.34$ $4.97 $5.61 21.00 18.61

CARDINAL HEALTH, INC. 85.01$ $5.00 $5.76 17.01 14.75

RITE AID CORPORATION 8.61$ $0.21 $0.31 41.25 27.39

ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.13.27$ $0.46 $0.58 28.85 22.97

Average 22.9 18.7

CVS Health $102.14 $ 4.31 $ 4.49 23.7 22.7

Implied Value:

Relative P/E (EPS15) $ 98.66

Relative P/E (EPS16) 83.78$

CVS HealthRelative Valuation Models

CVS Health

Key Management Ratios

Fiscal Years Ending Dec. 31 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Liquidity Ratios

Current Ratio (Current Assets/ Current Liabilities) 1.56 1.42 1.64 1.37 1.63 1.89 2.12 2.34 2.55

Operating Cash Flow Ratio (Operating CF/ Current Liabilities) 0.49 0.47 0.37 0.43 0.08 0.09 0.09 0.09 0.09

Quick Ratio (current assets – inventories) / current liabilities 0.71 0.65 0.93 0.74 0.90 1.14 1.37 1.59 1.80

Activity or Asset-Management Ratios

Asset Turnover Ratio (Sales/Total Assets) 166% 186% 177% 188% 191% 189% 186% 184% 182%

Inventory Turnover Ratio (Sales/Total Inventory) 10.7 11.2 11.5 11.7 11.2 11.2 11.2 11.2 11.2

Receivables Turnover Ratio (Sales/Average Accounts Receivable) 17.71 19.00 14.52 14.39 16.13 16.13 16.13 16.13 16.13

Financial Leverage Ratios

Debt-to-Equity Ratio (Total Debt/Total Equity) 0.26 0.26 0.35 0.34 0.32 0.31 0.31 0.32 0.32

Equity Ratio (Shareholders Equity/ Total Assets) 0.59 0.57 0.53 0.51 0.50 0.47 0.44 0.42 0.39

Interest Coverage (Operating Income) / (Interest Expense) 10.84 12.94 15.79 14.67 15.11 15.66 16.27 16.87 17.50

Profitability Ratios

Return on Assets (Net Income/Total Assets) 5.4% 5.8% 6.4% 6.3% 6.6% 6.5% 6.4% 6.3% 6.2%

Return on Equity (Net Income/Shareholders Equity) 9.1% 10.3% 12.1% 12.2% 13.3% 13.8% 14.5% 15.1% 15.8%

Gross Margin (Revenue-COGS)/COGS 26.1% 24.5% 25.4% 24.4% 23.0% 23.0% 23.0% 23.0% 23.0%

EBIT Margin (EBIT/Sales) 5.9% 5.9% 6.3% 6.3% 6.3% 6.2% 6.2% 6.2% 6.1%

Profit Margin (Net Income/Sales 3.2% 3.1% 3.6% 3.3% 3.5% 3.4% 3.4% 3.4% 3.4%

Payout Policy Ratios

0.19 0.22 0.24 0.28 0.28 0.28 0.28 0.28 0.28Total Payout Ratio (Dividends paid + Repurchases)/NI