CVS the Value in Health

The increasing centralization of healthcare in the United States can really pay off for investors. Case in point, CVS Health (NYSE: CVS), America’s second largest operator of pharmacies, which is also one of America’s largest administrators of prescription benefit plans.

On December 4, 2015, CVS was giving investors a 1.48% dividend yield and a return on equity of 13.5%. It was also one of the most profitable and fastest-growing healthcare providers in America.

On September 30, 2015, CVS reported a TTM revenue of $149.20 billion, making it the second largest retailer in America after Walmart Stores Inc. (NYSE: WMT), at least in terms of revenue. CVS’s revenue is also growing at an astonishing rate; it reported a TTM revenue of $135.14 billion in September 2014. That means its revenues grew by $14.6 billion in just one year.

CVS also reported some really intriguing numbers for cash-loving investors on September 30:

• A net income of $5.06 billion

 

• A profit margin of 3.22%

 

• A free cash flow of $1.272 billion

 

• Cash and short-term investments of $3.011 billion

 

• $8.264 billion in cash from operations

 

The Astonishing Size of CVS

CVS’s financial numbers make one thing clear: Size pays in the healthcare business. The revenue is coming from a massive footprint and huge customer base.

The following numbers show just how big CVS Health is and how that size is paying off. CVS’s current operations include:

• More than 7,900 drugstores.

 

• More than 1,000 clinics operated under the MinuteClinic brand, which attracted more than 27 million patients in 2014.

 

• More than 24,000 pharmacists on staff.

 

• 68,000 pharmacies that participate in its retail network.

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• 7 billion prescriptions filled in 2014.

 

• More than 70 million members in its prescription benefit plans.

If these figures are true, CVS now operates a healthcare system that rivals Britain’s National Health Service in size and scope. Its system is also growing quite fast; in June CVS inked a deal to buy Target’s (NYSE: TGT) 1,600 pharmacies and 80 medical clinics.

It is also expanding into new cities. BusinessDen reported that CVS had purchased two acres of land in Denver. CVS currently operates no stores in Colorado, where Walgreen (NASDAQ: WBA), Kroger (NYSE: KR) and Walmart dominate the pharmacy business. CVS does reach some Colorado customers through Target.

Quick and Dirty SWOT Analysis of CVS Health

Naturally, many investors will be wondering if CVS could be a good long-term investment. The best way to answer that question is with a quick and dirty SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis of CVS.

Strengths

 

• Operates one of the three largest prescription benefit plans in the United States. The size of the plan and the massive retail footprint provide a large captive audience. 

• Expertise in working with health insurance provides opportunities.

 

• Well-known and respected brand name.

 

• Operation of own prescription benefit plan means the company is not dependent on competitors such as Express Scripts (NASDAQ: ESRX) and UnitedHealth Group (NYSE: UHG).

 

Weaknesses

 

• Limited footprint: CVS does not operate in many states, particularly in the fast-growing Rocky Mountain region.

 

• CVS’s stores lack the amenities that competitors like Kroger, Safeway, Costco Wholesale (NASDAQ: COST) and Walmart can provide. It lacks groceries and filling stations for example.

 

• The alliance with Target could link CVS to a potentially troubled retailer with questionable prospects.

 

Opportunities

 

• Obamacare has greatly expanded the number of Americans with health insurance, particularly through the Medicaid expansion, and CVS’s customer base.

 

• America’s growing doctor shortage is expanding the demand for CVS’s MinuteClinics because many working-class family now lack access to traditional physicians.

 

• More large retailers like Target could sell their pharmacy and clinic businesses to CVS or let CVS into the building. One likely candidate could be Safeway Stores Inc., America’s second largest grocer.

 

• A dark horse opportunity could be the creation of single-payer medicine in all or part of the United States, which could lead to large new markets for CVS Health.

 

• Continued growth of Medicare and Medicaid will create many more customers with steady benefit plans.

 

• An aging and increasingly unhealthy population will greatly expand CVS’s potential customer base.

 

Threats

 

• Growing popularity of large retailers that offer amenities CVS lacks, particularly Kroger and Costco. Kroger’s gas stations and fuel points promotions in particular are a major lure for customers that CVS cannot match.

 

• The increasing price of insurance could increase the number of uninsured Americans and cut into CVS’s business.

 

• Rising drug prices could persuade customers to leave prescriptions unfilled or turn to alternatives such as online pharmacies.

 

• The growing popularity of online retail could reduce retail stores at CVS’s drugstores. 

• Growing popularity of dollar stores, Amazon.com and other deep discounters that can undercut some of CVS’s retail prices.

 

• CVS’s increasing size and scope could attract the attention of antitrust regulators or politicians. There could be calls for it to be broken up or shrunk at some point.

Recent developments in American healthcare have been very good for CVS. This company should continue to profit as American healthcare becomes more centralized and the United States slowly but surely moves toward a single-payer health insurance system.

Disclosure: Your ever faithful blogger owns some shares of Kroger.