Since July of 2016 CVS Health (NYSE:CVS) has been a nightmare for investors. This time three years ago, CVS stock traded at a little more than $97, today it trades at something closer to $57.
Despite making what seemed like smart moves, like dropping cigarettes, converting to a health format, adding clinics, and buying Aetna, the stock has continued to sink.
But analysts have suddenly warmed to CVS’ story. In the last month, the shares are up 8%. On July 11 alone they rose 4.68%. Even at that price, CVS is still selling at a retailer’s multiple of less than half its revenue.
It’s an illustration of the difference between the marketplace and the stock market. It’s a great opportunity for investors with a long-term view.
Chronic Conditions and CVS Stock
America spends 18% of its GDP on health care, but 75% of that is spent treating and monitoring chronic conditions. These are preventable diseases like heart disease, diabetes, and kidney disease.
This is what CVS has been focused on. By delivering services as well as products through almost 10,000 stores, the company hopes to gain a bigger share of this $1.1 trillion bonanza. Preventing obesity, treating alcoholism and ending smoking could be worth trillions more.
Analysts have been focusing on drugs, in the form of Amazon (NASDAQ:AMZN) and its Pillpack service or CVS’ Caremark Pharmacy Benefit Manager, but CVS has been diversifying away from the pure-intermediary model.
Aetna alone brings 22 million insurance accounts to the party. If CVS’ network can reduce the costs of covering those people, it can offer lower prices that increase that number. That’s what its HealthHUB strategy is all about.
Deliver the most common services and treatments from a storefront, add front-line clinics for primary care, of which CVS already has 1,100, and you have more cost control than any insurance rival. CVS hopes to turn 1,500 of its outlets into HealthHubs in the next two years.
CVS Stock and the Real Competition
CVS’ rivals in this area aren’t Amazon or even Walgreens Boots Alliance (NYSE:WBA). They’re other insurers like United Healthcare (NYSE:UNH), which dominates the private insurance market and managed care companies like Centene (NYSE:CNC), which uses company-owned facilities to handle Medicare and Medicaid at a profit.
Investors haven’t credited any of CVS’ moves for political reasons. Democrats talking about converting all health care to a publicly funded system makes them nervous. The possible end of Obamacare, pricing tens of millions out of the insurance market, also makes them nervous.
But CVS’ strategy can work in either case. If Democrats expand Medicare the companies that can cut costs fastest will benefit. If people are left without insurance, stores that offer the lowest-cost primary care and services grow.
The Bottom Line on CVS Stock
In its first-quarter report for 2020, delivered May 1, CVS earned $1.4 billion, $1.62 per share fully diluted, on revenues of $61.6 billion. This is the first fiscal year that has begun since the Aetna deal closed. CVS raised earnings guidance for the full year. Its 50 cent per share dividend, with its fat 3.6% yield, is thus affordable.
Because of its retail operation, CVS is the only insurer that can rival United Healthcare in size. That company’s revenues for the first quarter were $60.3 billion. It has four times the market share of Aetna in private insurance.
Most analysts consider United Healthcare the biggest winner in health care, but macro trends may be running against it. CVS stock is a winner for income investors right now, with that fat, affordable dividend.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear, 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 shares in AMZN and CVS.