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Monday, March 11, 2019
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Friday, March 8, 2019
CVS, Goodwill, and Enterprise Value

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Last week we had a post noting the sharp increase in goodwill and intangible assets listed on the balance sheet of CVS Health ($CVS). Those assets ballooned last year as result of CVS’s merger with Aetna, so that they now account for 58.6 percent of all assets the company lists.

That single example got us wondering: what other companies have reported a sharp increase in the value of goodwill and intangibles? So we visited our Multi-Company database page to investigate.

Our study was straightforward. We identified 263 firms in the S&P 500 that have reported goodwill and intangible assets for both 2018 and 2017. First we calculated how much those two line items were as a percentage of total assets, in both 2017 and 2018. Then we sorted our sample population based on largest gain in percentage from 2017 to 2018.

You can see our results in Table 1, below.

Some context: Among our 263 firms collectively, goodwill and intangibles accounted for 21.8 percent of all assets in 2018, unchanged from 2017. The median firm was a bit different: 30.8 percent in 2018, up from 28.5 percent. That’s a jump of 230 basis points in one year.

The nine above, however, are all well beyond the median. So financial analysts following any of these firms would have two questions. First, why the firm you’re following see such a sharp increase? Second, do you believe that increase is warranted, given all the other information you have at hand?

For example, sometimes the increase could be due to a large merger. Well, is the acquiring firm placing a lot of goodwill on the value of the target; or did the target bring a lot of goodwill with it because the target had acquired other firms in the past? That answer could leave a financial analyst with more questions to ponder about management quality and strategy, and whether that goodwill will meet expectations.

Or perhaps the increase comes more from other intangible assets rather than goodwill. Those could be patents, trademarks, contractual obligations — that is, things that are more reliable producers of cash. You might still have questions about whether those things are producing enough cash, or might be vulnerable to other forces that could devalue the asset. But questions about the value of intangible assets are different (sometimes very different) than questions about goodwill.

To demonstrate our point about follow-up questions, Table 2, below has our same list of companies with their changes expressed in dollar terms, rather than percentages. Look at Pentair ($PNR), ranked No. 1.

The value of Pentair’s goodwill and other intangibles actually fell from 2017 to 2018 in dollar terms. But total assets fell even more, so goodwill and intangibles ended up accounting for a larger percentage of the total anyway. Why? That’s an excellent question to ask Pentair executives.

Do It Yourself

All of this is easy to find in Calcbench. Just select the peer group you want to study, and use our Multi-Company page to pull up goodwill, intangibles, assets, and any other line-item you want. (For example, you might also want to compare goodwill and intangibles to shareholder equity.)

That gives you the data itself. Then you can use our Trace feature to bore down to the narrative disclosure that accompanies goodwill and intangible assets data, to find the context you want — or, if not enough context is there, to help you frame the questions you might ask on the next earnings call.

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