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CVS Stock Finds Itself in a Good Place at a Bad Time

An election year is dampening expectations for growth at CVS

CVS Health (NYSE:CVS) stock got a lift on Nov. 6 after delivering an earnings report that beat on both the top and bottom lines. The company also gave improved earnings estimates for the rest of 2019.

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Earnings of $1.85 per share exceeded the consensus estimate of $1.77 per share. CVS also reported $64.8 billion in revenue which was above expectations of $62.99 billion. For the full year CVS gave an earnings per share (EPS) range between $6.97 and $7.05. This was an increase from their prior estimate of between $6.89 and $7.

In a statement submitted with the earnings report, CEO Larry Merlo said, “Our third quarter results build on the positive momentum we have seen across the company since the beginning of the year. All of our core businesses performed in line with or above expectations, reflecting strong operational execution.”

However the market hates uncertainty. And with the United States entering an election year, the only thing we know is what we don’t know. Rising healthcare costs and insurance providers will be among the core issues. That means that CVS stock will likely be treading water as the company, and the industry, is faced with uncertainty.

CVS Stock Underperforming the Broader Market

Even though the CVS stock price continues to climb the day after the earnings report, the stock is still down nearly 10% in the last 12 months. And it took until this last earnings report to push CVS stock into the black in 2019.

This continues a trend. Over the last five years, CVS stock price is down 17.7%. The company will be spending a lot of their retained free cash flow (FCF) to pay down the debt from its acquisition of Aetna. And while the merging of the two companies has gone smoothly thus far, the syncing of the two organizations will be a question for investors throughout 2020.

The company is also facing higher costs associated with renovating existing stores and shutting others. CVS closed 46 stores this year and is projected to close 22 more stores next year.

A Complicated Business Just Added Risk

CVS Health is the country’s second-largest pharmacy chain behind Walgreens (NASDAQ:WBA). It is also the country’s largest pharmacy in terms of total prescription revenue. One of the real stories behind the country’s growth is that it has become one of the nation’s largest pharmacy benefits managers (PBMs). The PBM business determines which drugs are covered for patients and negotiates price discounts with the pharmaceutical companies.

In 2018, the company paid $40 billion to acquire Aetna, which put the company in the health insurance business. With this acquisition CVS believes it will be able to achieve even larger economies of scale. CVS already has some of the lowest per claim costs in the industry.

CVS Health’s PBM and drug distribution businesses were already exposed to political and regulatory risks. By adding health insurance to the mix, CVS has put itself more tightly in the crosshairs. Particularly as more attention is being given to healthcare costs.

The Centers for Medicare and Medicaid Services project U.S. healthcare spending to rise to $6 trillion by 2027, a 5.5% annualized growth rate. In the short-term, this has been a lift for CVS earnings. However, rising healthcare costs are leading to further cries from public and private payers for companies to cut costs. This puts pressure on margins that are already thin.

Is CVS Stock a Buy Right Now?

I like CVS stock for income investors. The company has a dividend yield of near 3%. And with a forecast for modest, single-digit growth through 2020, the dividend should be safe. To be fair, CVS did end a 14-year history of dividend growth in 2018. After taking on $40 billion to purchase Aetna, the company is maximizing its FCF in order to deleverage its balance sheet.

But the stock is not a good play for growth investors. The company has a good valuation at just under 10 times projected earnings. However, prior to its most recent earnings report, CVS stock was negative for the year. Even with the surge, CVS Health stock is up just over 10% in 2019.

And many of the same industry pressures remain. The industry still is facing government scrutiny of drug prices. There is ongoing pressure as Amazon (NASDAQ:AMZN) continues to become a larger presence in the pharmaceutical delivery space.

CVS has been a solid performer with good management. Its recent acquisition of Aetna is a bold move that, while it contains risks, is another example of the company’s intention to provide good value to its shareholders. And that may prove to be the case, but I don’t see a strong growth story for the stock in the next year.

As of this writing, Chris Markoch did not have a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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