Summary
- CVS has significant cost-savings ahead from its recent acquisition of Aetna and planned modernization.
- CVS vertical integration has increased the company's presence throughout the retail supply chain.
- The threat of new entrants with a non-traditional business model remains, but CVS's revamped business model should keep the competitors at bay.
- Strong e-commerce growth and improvements in the brick and mortar store concept (with health hubs) will support growth.
Opportunity
CVS (NYSE: CVS) is the largest American retail healthcare pharmacy, and it offers services in various segments, including Retail Pharmacy, Pharmacy Benefits Management, clinical services, Specialty Pharmacy, and digital services, as illustrated in Table 1.
Table 1: CVS, Core Segments
Source: CVS Investor Relations
In light of changing healthcare landscape trends, CVS has experienced a downturn since 2015. But we believe the bottom is reached and that a trend reversal is to take place.
Due to the company's acquisition of Aetna, earnings increased substantially in 2019. Furthermore, Q3 2019 results beat market expectations. We argue that the recent financial performance of the company, its strategic initiatives, together with continued cost-savings from the Aetna acquisition, will take the stock higher.
We see the management's strategic initiatives regarding modernization, brick and mortar store improvements, vertical diversification, and e-commerce as viable growth catalysts and economic moat, underpinning the intrinsic value generated by our DCF Model.
The management of CVS is aware of the need to future-proof the company, primarily increasing the differentiation of the business model. Hence, we believe the stock is not a value trap.
Financials
Chart 1 indicates the stable and consistent growth of the company's fundamentals since 2014. The company's revenues are increasing, along with EPS. The company is also paying dividends for the 92nd straight quarter.
Chart 1: Fundamental Growth.
Source: CVS Investor Relations
