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Can the CVS Shift to a Total Healthcare Company Really Work?

Aaron Levitt

Pull up a chart on top healthcare stock CVS Health (NYSE:CVS) and the results aren’t pretty. CVS stock has spent the better part of the last five years heading lower. And in fact, CVS has managed to underperform the S&P 500 and the broader healthcare sector by a wide margin. This year alone, CVS stock is down by almost 15%.

CVS Stock: Can the CVS Shift to a Total Healthcare Company Really Work?

Source: Mike Mozart via Flickr

While the part of that has to do with continued fear of pending regulation and government intervention in the healthcare market, the main part continues to be the firm’s shift from being simply a pharmacy into something more.

CVS has moved into being a total healthcare and wellness provider. Its buyout of insurer Aetna furthers that move. And with management touting some new initiatives at its investor day, CVS stock is fully taking the plunge into being a one-stop shop for Americans.

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The question is, will the moves work? CVS’s transition continue to be a risky one for investors. However, its new plans may actually pan out.

CVS Stock Makes It All About Health

The healthcare sector is always changing, and for CVS that meant moving beyond simply being a drug and retail outlet. To that end, CVS has bet big bucks on transitioning itself from a strictly healthcare-related retail stock into more of a total package. It bought Caremark, then nursing home/long-term care facility drug distributor Omnicare and now health insurer Aetna. These moves made the firm one of the leading benefits managers in the nation.

Since then, CVS has started to model its stores into more one-stop shops for all healthcare needs. They stopped selling cigarettes and added about 1,100 MinuteClinics to its stores. These walk-in clinics were designed to allow customers to get flu shots, basic diagnoses and pick-up a prescription for maintenance medications or simple illnesses.

And now the firm has continued to transition even further. After positive testing, CVS is prepared to unveil its new CVS HealthHub concept at roughly 1,500 stores. These HealthHub locations will feature expanded health clinic operations, including labs for blood work and health screenings. This could include genetic and other disease testing. Additionally, several locations will be staffed by healthcare specialists such as dietitians and even eye specialists. Finally, CVS plans on adding so-called wellness rooms to these locations. Here, customers can take a yoga class or attend a seminar on say, diabetes care.

CVS May Finally Get It Right

While it may easy to laugh at the idea of taking a yoga class at your local CVS, the new HealthHub concept and roll-out may actually pay some serious benefits for the retail chain.

First of all, it gets CVS ahead of online rivals. Amazon (NASDAQ:AMZN) has long hinted that it plans on getting into the pharmacy game and has continued to beef up its presence for generic, over-the-counter medications.

Secondly, telemedicine rivals like Teledoc (NSDAQ:TDOC) have surged in popularity with consumers for basic diagnoses. However, CVS has a potential win here with its new roll-out. Health services are one of the few areas untouchable by online means. Additionally, one of the drawbacks to TDOC is that you still need to make a trip to the pharmacy to pick up a prescription. With its MinuteClinics and HealthHubs, consumers are already in a location that can deliver that medication. It’s one stop, instead of two.

And there is the opportunity to upsell items as well. Consumers can grab other items that come with juicer margins — beverages, toilet paper, gallons of milk, etc. — while at the stores. After a vigorous yoga session, it becomes very easy for CVS to prominently display healthier snacks and drinks right outside its wellness rooms.

Then there is the health insurance angle to consider. Health insurance companies make money by having their users NOT get sick. For Aetna to boost its profitability, it pays for CVS to keep its members healthy. By offering these wellness programs, checkups and maintenance products, it can keep its members outside hospitals and potentially keep them from needing more intensive care in the first place.

Still A Risky Bet

The transition for CVS into being a full wellness stock has a ton of potential. It’ll allow the firm to fight online rivals, give people a reason to enter its stores and potentially make its insurance operations that much better. The question is, can it work?

I think it can, but it won’t be a walk in the park. CVS seriously needs to boost its customer service aspects to make the HealthHub concept a reality. In general, CVS is sort of a mixed bag when it comes to customer services. It seems that stores are either very well operated or they are terrible locations with no employees working. It’ll take plenty of dollars to make this happen. It hinted at the “billions in new tech” that it’ll need to invest to make the concept a reality. Without the CAPEX spend, this could turn into a joke. “Remember when CVS used to offer yoga classes?”

That needed spending could be an issue considering that it now has to pay for the $70 billion Aetna acquisition. Already, Omnicare has proved to be a tough pill to swallow. With regulatory pressures mounting, CVS may have a tough time getting the concept up and running effectively.

But it’s a gamble that investors may want to look at. CVS stock can currently be had for a dirt-cheap forward P/E of about 8 and it does pay a 3.6% dividend yield. At least it’s doing something to boost its long-term potential in the face of new rivals.

At the time of writing, Aaron Levitt was long AMZN stock.

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