CVS Solid With Aetna Deal on Track

CVS CVS reported a solid quarter, and we are reiterating our $96 fair value estimate for the narrow-moat PBM. The firm reported a robust increase in revenue for all segments as its efforts to become a preferred pharmacy in restricted networks drove retail top line and a good gain in client wins and client member growth bolster its PBM operations. Impressively, CVS was also able to expand its gross margin by 9 basis points--driven largely by strong gross profit performance from the firm's PBM operations. However, CVS' retail segment produced a 116-basis-point decrease in gross margins as it was forced to discount its generic pharmaceutical products in order to obtain preferred pharmacy status on several PBM pharmacy networks. Additionally, the firm's centralized costs as a percentage of revenue increased as management stated it is making investments using funds saved from the recent tax reduction. While these investments have tempered this quarter's results, we believe they will help lay the ground work for a smoother integration of Aetna assets once the transaction closes. Management stated it expects to close the deal once it has approval from five remaining states. The team feels confident it soon will receive approvals from the remaining states as they are in the final stages of negotiations with key jurisdictions.

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