CVS Health (Ticker: CVS) - Brief Breakdown
In my Brief Breakdowns,I pick a stock and present opposite sides – I present the bullish argument and the bearish argument.
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Company Description and Qualitative Analysis
CVS Health Corporation provides retail and corporate health services in the United States including traditional, voluntary, and consumer-directed health insurance products and related services. CVS offers pharmacy services, retail/LTC segment that sells prescription and over-the-counter drugs, consumer health and beauty products, and personal care products. At the end of 2021, CVS had approximately 9.9k retail locations and 1.2k MinuteClinic locations under management. CVS has competition in both Pharmacy and Retail segments of their business, but CVS has the largest market share of 28.6% in the retail section of their business. CVS’s retail footprint in combination of the COVID-19 pandemic have made CVS a force to be reckoned with in the retail pharmacy space. CVS will continue to grow and innovate to find ways to better serve their customers and the growing need for health related services will make that retail space more valuable.
Quantitative Analysis
At the time of this writing (9/26/2022), CVS is trading at $98.35 with a market cap of $129.12B and a 52-week range of $81.78 - $111.25. In Q2 of 2022, CVS reported total revenues up to $80.6 billion which was up 11.0% YoY, GAAP diluted EPS of $2.23 and adjusted EPS of $2.40. The price to earnings ratio (P/E) is 16.02, the net margin is 2.65%, and the debt to equities ratio is 2.06. You can view CVS’s 2022 Q2 earnings here and their 2021 Annual Report here.
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Bullish Thesis
Here are three points to support the bullish thesis:
Retail footprint: As stated in the beginning, CVS has over 10k stores that they own and operate. This retail footprint is absolutely massive and gives everyone who lives in the United States a high probability to be near a retail store. This will give every American the ability to use a CVS pharmacy for their pharmaceutical needs and simply as a convenience store. This will give CVS a steady profit and a chance to draw customers in for sales.
Market Share: CVS has over a quarter of the retail footprint for pharmacy stores in the United States and because of the profit, that can continue to increase. CVS is a trusted brand and many will find comfort in going to a CVS over many other pharmacy retail spaces. Humans are creatures of habit and the more CVS that are available, the more pharmaceutical needs will be met for Americans by CVS.
Client Retention: CVS has a 97% client retention rate and that is in large part due to the retail footprint. For the most part, clients will not change pharmacy providers as long as the location remains convenient and remains in business. As more locations begin to pop up, more clients will stay with CVS and remain clients for a very long time.
Bearish Thesis
Here are three points to support the bearish thesis:
Potential Change of Policy: Changing healthcare policy always seems to be a topic of discussion for every administration. This can drastically change/affect the pharmaceutical and healthcare industry which can change the margins of CVS. The changes to margins will change the revenues of CVS and with increasing cost of labor, CVS overall profit will likely decrease. Regulations could come and hit CVS pretty badly, but then again this is all speculation. Without knowledge of the future policies and how they may change healthcare policies,
Drug price increases: There has been less development of generic drugs by CVS in recent years compared to the brand name equivalent. CVS makes a higher margin on those generic equivalents, but there has been less development. This is a worrisome trend that I hope will not continue because a major benefit of having your own retail stores is being able to control the retail prices of many items. The generic equivalents give more of a reason for retail shoppers to come in store to purchase cheaper alternatives.
No more pandemic boom: There may be a global depression that is nearing and if that is the case, generic goods will be one of the many places that are cut in order to save money for food and other necessary products. There is no more pandemic that will cause many to go to CVS for various pharmaceutical needs, generic drugs, excessive amounts of cleaning products and much more. CVS will hopefully continue with the amount of retail sales it has seen, but I believe we may see a gradual then sudden decrease in the coming months.
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Brandon
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Disclosure: The article was written by Brandon Keys, and it expresses the author's own opinions. I am not receiving compensation for it. I have no business relationships with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Brandon is not a financial advisor. I encourage all readers to do further research and do your own due diligence before making any investments.