CVS Health (CVS) keeps a high profile; it operates about 10,000 drugstores, with locations within three miles of 70% of Americans, asserts blue chip stock expert Richard Moroney, editor of Dow Theory Forecasts.
In 2018, CVS filled more than 1.9 billion prescriptions, accounting for 26% of the U.S. market, and its retail operations generated $82 billion in revenue. Yet as massive as this iceberg looks, even more lurks below the surface.
In the first three quarters of 2019, the company generated nearly $190 billion in revenue, with $104 billion from pharmacy-benefi t-management (PBM) services provided to employers, insurers, and employee groups encompassing more than 92 million customers.
The PBM unit provided 47% of revenue and 29% of operating income in the nine-month period. CVS also operates an insurance unit (24% of revenue, 35% of earnings), in addition to its namesake drugstore chain (29%, 37%).
In the 12 months ended September, CVS generated $12.7 billion in operating cash flow, more than double the same period a year ago, while free cash flow of $7.8 billion more than tripled year-earlier levels.
During that 12-month period, revenue jumped 29%, mostly driven by the November 2018 acquisition of health insurer Aetna, while per-share profits rose 16% despite a 28% higher share count connected to the merger.
Analysts project a 21% decline in per-share earnings in the December quarter, followed by gains of 2% in 2020 and 6% in 2021. Cost pressures at the retail unit and tight PBM pricing are crimping growth.
In early November, CVS projected at least $400 million in merger-related savings for 2019, growing to at least $800 million in 2020. CVS expects to have HealthHubs operating in four metro areas by the end of this year, with 1,500 locations online by the end of 2021, building on its existing network of MinuteClinics.
Augmented by Aetna’s care network, HealthHubs offer an expanded menu of health services, nutritional counseling, support for home-healthcare devices, and a wider variety of medical equipment and supplies.
The cost of building out HealthHubs is folded into an earlier projection of $2.3 billion to $2.6 billion in capital spending for 2020, drawn from the pool typically used to renovate stores. Aetna also expanded CVS’ exposure to the Medicare Advantage market.
Because CVS took on more than $40 billion in long-term debt to handle the Aetna purchase, the company has suspended dividend increases and share buybacks until 2021 at the earliest, as it focuses on easing off the leverage. Total debt has declined by $6 billion over the last two quarters.
At 10 times trailing earnings, CVS trades 56% below the median provider of health-care services and 40% below its own three-year average. At that price, CVS seems poised for solid gains if it exceeds modest expectations — which we believe it can. CVS, which yields 2.7%, is a Long-Term Buy.