CVS: Betting on Healthcare

facade of a CVS Pharmacy

CVS Health Corporation (ticker: CVS), based in Woonsocket, RI, calls itself a “pharmacy innovation company” offering over 9,500 retail pharmacies, 1,100 walk-in medical clinics, a pharmacy benefits managers (PBM) division with more than 70 million plan members, and a specialty pharmacy services division, which specializes in the treatment of rare or complex conditions.
Given demographic shifts and the expansion of medical insurance coverage, the North American pharmaceutical market is forecast to grow 4–5% by 2019, with branded growth of 3%, generic growth of 7%, and specialty pharma growth even faster, accounting for more than half of the industry’s growth over this period. CVS Health is well positioned to capture this growth with its focus on specialty pharma and to benefit from the growth in generics (which, somewhat counter-intuitively, have lower prices but higher profit margins).
CVS Health aims to be a key player in the health care industry and touts its integrated enterprise as a key growth driver and advantage that pure-play peers lack. In 2014, the company rebranded itself as CVS Health from “CVS,” banned tobacco products from its stores, started to focus on health-related services (including its pharmacy and in-store health clinics), and created its own Digital Innovation Lab to create smart devices and apps to improve health care. (In a move hailed by activists, CVS Health also quit the U.S. Chamber of Commerce in July 2015 because of the group’s pro-tobacco lobbying.) In 2016, Fast Company named CVS Health the most innovative company in retail.

According to one recent survey, CVS Health’s decision to stop selling tobacco products has had an effect on cigarette smokers, including making it harder for them to buy cigarettes and therefore helping to achieve their goal to stop smoking. But the move was not without significant cost, with year-over-year same-store sales down 5.2% in Q4 2015 due to the loss of tobacco sales and the associated basket sales.
CVS Health new focus continues to grow both the top and bottom lines at double-digit rates. Operating earnings have grown by double digits annually since 2011 (with one exception) and long-term (2013–2018) revenue growth targets are between 9% and 13%. Including the accretive value of CVS Health’s recent acquisitions of Omnicare and Target pharmacies, analysts expect long-term revenue growth will be close to double digits. The stock also offers a modest dividend.
CVS is a high-quality company, in very good financial health, with a strong track record of growth and expected continued double-digit long-term growth.
CVS Health
Revenues: $163 billion
2016 PE ratio: 20.85
Projected Earnings Growth: 10–14%
Dividend Yield: 1.76%
Stock 52-week Low–High: $81.37–$113.65
Risk: Below average