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CVS Stock Bears Have Got It All Wrong

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Tom Taulli
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This year’s bull market has passed by many notable companies. Just look CVS Health (NYSE:CVS) stock. It’s gone from $65 to $56.

CVS Stock Bears Have Got It All Wrong
CVS Stock Bears Have Got It All Wrong

Source: Shutterstock

Yet this has not just been a temporary thing. Keep in mind that since 2015, CVS stock has been in a downtrend. The high was $113.65.

But of course, the company has been transforming itself. No doubt, the biggest move was the $70 billion acquisition of Aetna, which closed in November 2018.

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So why the general bearishness?  Well, the pharmacy benefit management (PBM) business has been sluggish. Then there is the potential disruption from Amazon.com (NASDAQ:AMZN), which has been investing more in the healthcare space. And as the Presidential election looms, there are concerns about the potential change of the health insurance industry; specifically to a Medicare-for-all approach.

Yet I think the concerns for CVS stock have been already factored in. Note that the forward price-to-earnings ratio is 8x and the dividend yield is a reasonable 3.6%. And while the debt load is at a hefty $65 billion, the company continues to churn out juicy cash flows.

The Pros on CVS Health Stock

Now through the deal-making and restructuring, CVS is a diverse platform: the company generates revenue streams from pharmacy services, retail/LTC and healthcare benefits. All these businesses are highly synergistic.

But more importantly, CVS is positioning itself to meet the dynamic changes in healthcare. First, there’s the transition from sick care to self-care. Then we have the aging U.S. population, especially concerning the Baby Boomers, as well as the changes in reimbursement practices and business models. Finally, we’re witnessing the transition to personalized care.

All these changes require new approaches but also a major physical footprint.  As for CVS, the company is certainly nicely positioned.  There are close to 10,000 pharmacies across the U.S. In fact, 70% of U.S. population lives within three miles of a CVS location.

The company also has been expanding its MinuteClinic locations (there are over 1,100). They provide roughly 80% of what a typical primary care practice does. Management is also expanding their scope to include more services, such as help with diet and nutrition. Consider that the locations have handled 42 million visits with a 95% customer rating.

And of course, Aetna has made CVS a big player in the critical insurance market. The company now has 38 million members. These memberships include important categories like Medicare Advantage offerings and Medicare Part D prescription drug plans.

The deal will also result in substantial cost savings that should help drive CVS Health stock. In fact, they are expected to hit $750 million within two years.

Bottom Line on CVS Stock

Other mega health operators like UnitedHealth Group (NYSE:UNH) and Cigna (NYSE:CI) are also transforming their businesses. It’s all about building vertical platforms that allow for synergies, cost savings and better service.

At the time when CVS closed its acquisition of Aetna, CEO Larry Merlo emphasized the shift in strategic vision. He stated that the combined company “will have a community focus, engaging consumers with the care they need when and where they need it, will simplify a complicated system and will help people achieve better health at a lower cost.”

This is spot-on. True, the changes are risky and far from guaranteed. But then again, the company has so far been able to manage the moving parts, continues to be highly profitable and the shares are trading at value levels. In other words, for investors looking at an interesting play on healthcare, this one looks like a pretty good choice right now.

Tom Taulli is the author of the upcoming book, Artificial Intelligence Basics: A Non-Technical IntroductionFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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