Despite earnings that beat estimates, CVS Health (NYSE:CVS) remains in the market’s doghouse. Rich not, CVS stock is trading around $72. That’s a market cap of $92.5 billion on revenue of $268.7 billion.
Shares are selling for just over 6 times last year’s $15.9 billion in operating cash flow. Investors are ignoring conservative guidance that it can keep up the pace.
The market is ignoring most value stocks like CVS, even with a 2.84% dividend Stocks: Understanding Their Benefits and Risks | InvestorPlace, because speculators believe all tech stocks are above average. It’s a fashion that will change as the marketplace separates winners from losers.
Meanwhile, I took profits in one of my favorite tech stocks and bought some CVS Health.
Changing Demographics and CVS Stock
One thing the market is ignoring is America’s changing demographics. I’m the exact age of the average male baby boomer. I turned 66 last month. I still feel good. I plan to keep working. But Father Time remains undefeated. This is true for my generation as it will be for yours.
While I can still get by on good genetics, that won’t always be the case. CVS Health and the health care system are going to help me toward that long dirt nap.
Along with Caremark, its pharmacy benefit manager, CVS is the only health care company with the scale to go toe-to-toe with market leader United Healthcare (NYSE:UNH). UNH has a market cap of $300 billion on trailing year revenue of $257 billion.
CVS stock is selling for just 40% of its revenue, United is selling at a premium to its. The difference is that UNH brought 6% of its revenue to the net income line last year. CVS’s margin was about 2.6%.
Fair enough. The question is whether that will continue. The health care marketplace is changing.
Managed Care Decade
Traditional insurers didn’t do well in the exchanges. What works there is managed care. The difference is that insurance is a bet against your being sick, with the insurer paying bills as they come in. Managed care is a bet on your being well, at least staying out of the hospital. A managed care company wants you to get a checkup, and practice good habits, and take your medicine. Keeping you out of the hospital is the game.
To win the game a managed care company must own clinics and treat doctors as employees. It must make sure they follow established protocols. It must control drug costs. It must have the ability to say no if it’s going to control its outgo. About 75% of health care bills are for chronic conditions like heart disease and diabetes. Those respond well to managed care.
CVS is now in good position to do this. Its Minute Clinics can provide cheap front-line care. Its pharmacy benefit manager, Caremark, can keep drug costs down. It’s getting into acute care, starting with dialysis clinics.
The Bottom Line
Even if the Affordable Care Act is ruled unconstitutional, managed care is going to grow.
Medicare and Medicaid are managed care programs, covering people at higher risk for illness than those on employer insurance. Centene (NYSE:CNC) makes money here. Not coincidentally it does well on the exchanges.
CVS has now transformed itself to compete in managed care. It operates in specialty pharmacy, where drugs are taken to patients, in long-term care, and in infusion services.
It’s set up to grow in the new market, and when analysts realize this the stock price will rise. While you wait there’s that dividend yield. It may not be a home run, more like a consistent string of singles, but that’s what an aging investor wants to see.
At the time of publication, Dana Blankenhorn directly owned shares in CVS.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at firstname.lastname@example.org, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.