CVS Health (NYSE:CVS) shares rose sharply after it beat earnings estimates, but the stock remains dirt cheap. The company earned $1.427 billion, $1.62 for each fully adjusted share, on revenues of $61.6 billion. It was the first quarter that included results from Aetna, the health insurance company CVS Health bought last year. Most analysts credited Aetna with the strong numbers.
A raise in the earnings forecast for the year, from $6.68-$6.88 per share to $6.75-$6.90 per share, also helped the shares gain nearly 4.5% in early trade on May 1.
But if the company’s earnings forecast is right, its price of about $57 per share is barely 8 times earnings. Its dividend of 50 cents per share will yield 3.6% to today’s stock buyer.
If the forecast is off, it’s on the low side.
Customer Control for CVS Stock
I have been pounding the table for CVS for some time so let’s review.
The issue here is customer control, linking payments on health services with the income from health coverage. You can’t have an unlimited draw from a limited pool of funds. The only way to control costs, whether the system is run publicly or privately, is to have control over spending.
That’s what CVS is bringing to Aetna customers. It owns Caremark, a pharmacy benefit manager that can steer people to cost-effective solutions. It also owns a network of Minute Clinics that can handle front-line care efficiently, using nurses, physicians’ assistants and electronic health records.
This is the secret of industry winners like UnitedHealth (NYSE:UNH), which dominates in employer-paid insurance, and Centene (NYSE:CNC), which is achieving dominance in Medicare. The difference is that Centene has even more control over costs through acute care clinics and links to hospitals than UNH or CVS.
Such “managed care” plans can be efficient, because most of the cost of medicine today is in dealing with “chronic conditions” like hypertension and diabetes. Here patient compliance and regular check-ups are key to keeping costs down.
CVS’ decision to bring in insurance dollars, and manage those dollars, now makes it very different from Walgreens (NASDAQ:WBA), once its drug store doppelganger. While CVS is selling customer control, Walgreens is selling customer convenience.
There may be more good news coming to the sector very soon.
Cigna (NYSE:CI), which unlike Aetna decided to be a buyer rather than a seller, closing on pharmacy benefit manager ExpressScripts last December, is due to report May 2. Analysts expect earnings of $3.74 per share. They are hoping for $3.81. If Cigna could maintain that pace for the year, it would have a forward price-to-earnings multiple of a little over 10, based on its May 1 price of $161 per share.
Here again, the goal is to same. Cigna is getting ExpressScript’s ability to bargain, to create formularies, and to drive people to cost-effective, best practice solutions. It is also getting ExpressScript’s drug delivery, and its ability to administer drugs directly to patients, increasing compliance on chronic conditions.
The Bottom Line
What the private sector is doing, through CVS Health, Centene, UnitedHealth and Cigna isn’t a complete solution to the nation’s health care cost crisis.
That’s one reason why CVS Health, and the rest of the industry, is fighting the concept of Medicare for All. They fear government bargaining on acute care and drug costs, which the Veterans Administration has. They first want it for themselves, and they’re slowly getting it.
In the end, what the industry has to fear aren’t Democrats, but business customers who now see 18% of GDP going out the door, while overseas competitors pay a fraction of that cost.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.