Income and Growth Investors Will Benefit as CVS Adopts Managed Care
CVS is transitioning into a low-cost competitor of UnitedHealth, embracing the managed care model
It’s never easy to marry companies that seem to exist in different industries. This is especially true if a buyer is on what looks like the “failing” side of the equation.
That’s the case for CVS Health (NYSE:CVS).
Net income of $1.7 billion, $1.73 per share, on revenue of $66.9 billion beat analyst estimates by 5 cents per share. Those numbers even beat the company’s own projections.
This didn’t cause investors to rush into the stock. That’s because results from other health insurers, most notably UnitedHealth Group (NYSE:UNH), looked better. The jury is still out, one reporter wrote, on whether combining a company that takes healthcare premiums with one that sells healthcare services makes sense.
No, it isn’t.
Could be Walgreens
Don’t compare CVS to UNH, which has been walking down the managed care road for years, or Centene (NYSE:CNC), built to serve Medicare and Medicaid patients. Compare it to Walgreens Boots Alliance (NASDAQ:WBA), the other major drug store chain.
There’s no comparison. Over the last year CVS stock is up 8.6%, mid-way between the gains of UNH and CNC. Walgreens is down 25.1%.
Cynics will say CVS’ results only looked good because it sold more drugs and charged higher prices for branded drugs. They will say CVS only bought Aetna, a major health insurer, for $69 billion to lower its costs.
But CVS didn’t buy Aetna to lower drug costs. CVS bought Aetna so it could match the income from premiums to the outgo of healthcare spending. The income is now starting to flow. Revenue for the entire company was up 32% over a year ago, representing Aetna premiums. The shift of claims into CVS is still ongoing.
There are other benefits to CVS from getting into insurance. The repeal of the Health Insurance Fee (HIF) will flow through to CVS, through Aetna.
More to Come
What remains to be seen is how competitive Aetna can be, now that more benefits are being served through CVS stores. CVS MinuteClinics can now handle 80% of what a primary care physician can treat, often with no copay or reduced costs.
CVS is building on that by turning 1,500 stores into HeathHUBs, selling services as well as products. The plan is for the new stores to add incremental business from Walgreens. It also makes Aetna more attractive, by lowering out-of-pocket costs. Stores that have converted to the new format outperform traditional CVS stores, the company said on its conference call.
CVS is now projecting earnings between $7.04 and $7.17 per share in 2020. Based on the stock’s Feb. 13 opening price of $73.45, that’s a forward price-to-earnings ratio of barely 10. The 50 cent per share dividend also pays a yield of 2.7%. By way of comparison, the yield on UNH is 1.5%.
The Bottom Line on CVS Stock
It’s true that CVS is trying to become more like UnitedHealth. It’s becoming less like Walgreens. CVS is aiming to be a low-cost leader in managed care for the private insurance market.
That’s good news for both income and growth investors.
For income investors, you’re already getting a better yield on a new CVS investment than on any managed care stock. For growth investors, you are still getting in early on the transition.
Managed care is the model for all insurers going forward. This is true whether they’re taking money from government, corporations or individuals. You can’t have an unlimited draw from a limited pool of funds. That’s the road CVS Health has embarked on.
Dana Blankenhorn is a financial and technology journalist. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned shares in CVS.