Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


CVS Health is a Revenue Generating Machine

CVS Health (NYSE: CVS) has become an incredible revenue generating machine. The drugstore and prescription plan operator’s revenues grew by $21.15 billion in just a year.

CVS reported revenues of $145.58 billion in June 2015 and $166.73 billion in June 2016. That makes CVS the second largest publicly traded retailer in America in terms of revenues, the largest is Walmart Stores Inc. (NYSE: WMT) which reported $483.83 billion in revenues on July 31, 2016.

The company currently operates more than 9,600 pharmacies and 1,100 Minute Clinics in the United States. That makes CVS America’s largest drug store operator; its largest competitor Walgreen (NASDAQ: WBA) operates 8,173 stores in the United States. Walgreen would greatly exceed CVS’s footprint if the Federal Trade Commission ever gets around to approving its acquisition of Rite Aid (NYSE: RAD). Rite Aid currently operates around 4,572 stores in the United States.

Although it should be noted that CVS is far more than just a retailer; it is also one of the nation’s largest providers of prescription drug coverage for employers and health insurance companies. In addition to its own stores, CVS operates a national network that includes 68,000 retail pharmacies. Its health plans have around 75 million members according to the CVS website.

CVS is Making a Lot of Money

All of this is very profitable, CVS claims to have made $40 billion from specialty prescriptions alone in 2015. The financial numbers seem to bear out CVS’s claims, it is making a lot of money for a retailer.


The financial numbers for June 30, 2016, indicate that CVS is generating a lot of cash and float in the form of:

  • $4.81 billion in net income.


  • $1.107 billion in free cash flow.


  • $1.207 billion in cash and short-term investments.


  • $9.141 billion in cash from operations.


  • $4.047 billion in cash from financing.


The company also reported a lot of value in the form of $92.75 billion in assets at end of second quarter and an enterprise value of $123.31 billion on September 27, 2016.

All of this proves that prescription drugs are the fastest growing and most profitable segment of American retail right now. CVS’s revenue growth rivals that of Amazon (NASDAQ: AMZN).

During second quarter 2016, CVS added $6.56 billion in revenue; it started with $160.17 billion in revenues in March 2016, and finished with $166.73 billion in June 2016. Amazon added $7.22 billion in revenue during the same period, the Everything Store started with $113.42 billion in March and finished with $120.64 billion in June.

Is CVS Amazon Proof and Deflation Proof?

This indicates that drugstores like CVS and Walgreen seem to be at least partially immune to the Amazon effect and the price deflation that has been hitting other retailers like Kroger (NYSE: KR).


This is partially because Amazon is unable to sell prescriptions so it does not directly compete with drugstores in their highest profit area. Another advantage is that CVS exposure to food price deflation is limited.

Price deflation occurs when retailers’ prices fall low they cannot cover costs – this seems to be happening to grocers right now. Grocers are slashing prices at an incredible rate Bloomberg reported that the United States is now its longest streak of food deflation since 1960. Aldi was selling a dozen eggs for 99¢ in New Jersey and Texas grocer HEB cut prices on beef ribs by 40%.

All food prices fell by 1.8% in August 2016, 1.6% in July 2016, and 1.5% in June, Bloomberg reported. That means food prices fell by 4.9% or nearly 5% in just three months.

Unlike Kroger; where groceries are the primary business, food is a sideline at CVS. Kroger is also a major player in the filling station business so it is heavily exposed to fuel prices where deflation has been greater than for food. CVS operates no gas stations so it is not exposed that deflation either.

Is CVS the Best Retail Investment?

Naturally some people will be wondering if CVS is the best retail stock out there today because it seems to be both deflation and Amazon-proof. The answer is maybe because I think this company is a little overpriced, it was trading at $88.99 a share on September 30, 2016.


Yet it offered investors a return on equity of 13.2% in June and a dividend yield of 1.8% on September 27, 2016. Those investors are scheduled to take home a dividend of 42.5¢ on October 20. CVS’s dividend grew by 8.5¢ over the past year, it was 35¢ in October 2015.

CVS has a Lot of Growth Potential

All this makes CVS a pretty good growth, income and dividend stock with really good long term growth prospects. America is getting older, which means Americans will require more prescriptions meaning lots of new customers for CVS there are now around 74.9 million Baby Boomers (people aged 51 to 69) in the United States, according to the US Census.

Every Baby Boomer will be eligible for Medicare Part D (which covers prescription drugs) by the year 2031. Meaning that CVS will have tens of millions of potential new customers with Uncle Sam picking up a large part of the tab. Things might get even better if Congress goes along with Hillary Clinton’s proposal to extend Medicare to persons 55 and over.

Nor is an aging population the only growth prospect CVS has. The company is experimenting with CVS Curbside Pickup an app that lets customers order online and pick-up at the curb, Chain Store Age reported. That’s an effort to counter similar offerings from Kroger and Walmart.

The app is popular it was so popular that CVS had to suspend a beta test on September 22, because the website could not keep up with demand, The Boston Globe and Chain Store Age reported. CVS plans to roll Curbside Pickup out at 4000 of its stores nationwide next week.

It goes without saying that such an App can be easily integrated with a same-day delivery service like Google Express or the ones that Uber and Lyft are testing with Walmart. That gives CVS even more growth potential, making it a great long term and buy hold play.

If CVS can avoid the deflation that’s hitting supermarkets like Kroger it should report yet another great quarter of revenue growth in October. More importantly that growth looks like it will continue for the foreseeable future.