When it comes to CVS (NYSE:CVS), there has been little traction. For the year so far, the return is a mere 6%, despite the overall bullishness in the markets. But this performance is not a temporary thing. Note that over the past five years, the average return on CVS Health stock has actually been -2.34%.
There are legitimate reasons for this — and yes, other pharmacy operators have shown weakness, such as Walgreens Boots Alliance (NASDAQ:WBA) and Rite Aid (NYSE:RAD). After all, because of escalating costs, the health care industry is under much scrutiny from the government. The situation will only get more intense with next year’s presidential election.
Next, there is the potential of technology disruption, especially with the retail pharmacy business. Amazon (NASDAQ:AMZN) is making a big play for this opportunity, such as with acquisitions for startups like PillPack.
But despite all this, I still think the worries are overhyped. All in all, CVS stock does look like an interesting value right now.
CVS Revamping Store Experience
In fact, the retail business should represent a key advantage in the coming years. Let’s face it, millions of people still like the convenience as well as the access to qualified pharmacy professionals.
The good news for CVS stock is that the company’s distribution footprint is vast, with over 9,900 retail locations. Every day, more than five million customers make a visit. The company also has the ExtraCare Reward program, which has over 77 million active members (or about a quarter of the U.S. population).
Keep in mind that CVS has been rethinking the brick-and-mortar retail experience. Here are just some of the efforts:
- Wellness: Over the years, CVS has been expanding its merchandise mix, such as in areas like nutrition, sleep therapies, treatments for moods and so on. The company has also taken a leadership role in helping to boost the quality of vitamins and supplements, which involves the use of third-party testing of ingredients.
- Beauty: CVS has revamped this part of the business. To this end, there is more of an emphasis on healthier offerings. For example, a sun care product should not have an SPF of lower than 15. There are also no sales of products that have parabens, phthalates and formaldehyde donors.
- CVS Pharmacy app: This provides personalized programs for the user, say by helping with starting and staying on prescriptions, providing for notifications and allowing for refills using “Scan to Refill.”
Bottom Line on the CVS Stock Price
About a year ago, CVS completed its transformative merger for Aetna – a deal valued at about $69 billion. The vision was bold: to provide an end-to-end integrated healthcare model to deliver quality healthcare options at lower costs. All this would be backed up with analytics, so as to help with preventative medicine.
Granted, large acquisitions are fraught with risks because of the integration and melding of different cultures. But so far, the CVS-Aetna deal seems to be tracking fairly well. More importantly, there should be long-term benefits that go beyond just cost cutting.
Consider that in the latest quarter there are already encouraging signs of a pick-up in the business. Note the company raised its adjusted profits guidance to $6.89 to $7 on CVS stock, up from the prior forecast of $6.75 to $6.90. A big driver continues to be Aetna’s thriving Medicare business, which is benefiting from secular growth trends.
Finally, CVS stock has an decent dividend yield, which is at about 3%. The valuation is also attractive as the shares trade at forward price-to-earnings multiple of 9.45x. So, as the transformation continues to take root, there is much potential for CVS stock.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
