CVS Health Corp. (CVS, Financial) has grown from a drugstore retailer into a leading health solutions company. The company is currently celebrating its 60th anniversary with a 26% drop in share price.
I have written about CVS for five years now, going back to my first article in June 2018, then again in January 2019 and finally advocating for dollar-cost averaging in March 2019. The company's market value is slightly higher today than in June 2018 and March 2019, but it should be much closer to par with its revenue.
At the time, CVS was merging with health insurer Aetna. Aetna brings in nearly $1.3 million in revenue per employee, which is over $60 billion. And while CVS’s debt jumped significantly in 2019, the company has paid it down, even making further acquisitions like its May closing on primary care company Oak Street Health for $10.6 billion. The point is CVS has added more to its future value since 2018, but is priced at approximately the same value.
CVS has some serious competitive advantages
The sheer scale and scope of the company’s deliverables is impressive. That also gives it purchasing power, which helps keep costs low for the customers. It will eventually have to raise prices, and that is where top and bottom line revenue will benefit massively long term.
CVS has over 9,500 retail drugstores in the U.S., Puerto Rico and Brazil. These stores offer prescription drugs and a wide assortment of general merchandise, including over-the-counter drugs, beauty products and cosmetics, film and photo finishing services, seasonal merchandise, greeting cards and convenience foods. The stores also provide health care services through its MinuteClinic medical clinics and diabetes care centers. They can also be found in many Target stores.
The pharmacy services segment provides a full range of pharmacy benefit management solutions, including plan design offerings and administration, formulary management, Medicare Part D services, mail-order and specialty pharmacy services, retail pharmacy network management services, prescription management systems, clinical services and disease management services. The PBM segment operates under the name CVS Caremark.
The health care benefits segment, operating as Aetna, offers a broad range of traditional, voluntary and consumer-directed health insurance products and related services. These include medical, pharmacy, dental, behavioral health, group life and disability plans, as well as medical management capabilities, Medicaid health care management services, workers' compensation administrative services and health information technology products.
Building a behemoth
In the last 20 years, CVS has consistently grown revenue with only one down year (2010) since 2001. In 2003, the company reported $26 billion in sales. By 2013, that number was $126 billion. Last year, revenue surpassed $322 billion. In the same time frame, starting in 2003, pre-tax earnings have shot up from around $1.2 billion to north of $8 billion with a brief stop in the $12 billion range. All totaled, that is nearly $140 billion in earnings before paying taxes, which unfortunately are significant.
CVS Health has also been acquiring and partnering with various health companies. In 2023, for example, it made significant investments in primary care, including the purchase of Oak Street Health, a hybrid care provider, and bought Signify Health for $8 billion, a health services company with over 10,000 providers serving more than 2.5 million patients in all 50 states. The company also invested $166 million in Strive Health's Series C round and led a $375 million round in Monogram Health, which specialize in home and virtual care for patients with chronic conditions. Furthermore, it has partnered with startup Carbon Health to pilot a primary and urgent care clinic model in CVS stores. These deals are going to drive the continued market dominance for CVS.
Thoughts on valuation
CVS has one of the most well-known brands in the world; however, gross margins are horrific at 17%. That said, it does generate $20 billion a year in cash from operations. It has nearly $18 billion in cash and $56 billion in long-term debt. Shares are priced with a forward price-earnings ratio of 9.60, well below the company’s five-year average of 15 and 64% lower than the sector median.
Maybe there is not a lot of room in the industry to have a retailer own a health care company too. Maybe there is a hard cap on what the value of that company could be. However, if some private buyer or buyers with $100 billion to deploy bought CVS, it would be a good deal. While the price-sales ratio for the company has fluctuated (mostly below a 1:1 parity), this is the lowest it has ever been.
At 50% of revenue, the market capitalization would likely exceed $200 billion in the next four years as new contracts and acquisitions hit the top line. At 75% of revenue, investors would see a $300 billion cap. Even Walmart (WMT, Financial) trades at 67% of sales and has roughly the same operating margins, historically, as CVS.
With the stock trading very close to its book value, the bottom is in.
