CVS Health Corporation (CVS)

[FUNMAN]

CVS Health: Corner Store And Healthcare Transformed
Aug. 10, 2020 9:21 AM ET

See my blue highlights below:

IMO, One problem I see is CVS's debt is very high but they don't care about it. The cost of debt is so low that they have no incentive to bring it down any fast. By not increasing the dividend (not done in 4 years), and not buying back shares or paying off debt, they are stagnating the PPS.

I love CVS and added last week, but mgmt, help a guy out. - FUNMAN

Read at this link to see all of the charts and graphics:

https://seekingalpha.com/article/4367015-cvs-health-corner-store-and-healthcare-transformed

Summary

CVS/Aetna is a true, one-of-a-kind "Health Innovation" business.

Tech is pushing it forward; Health and Consumer Goods keep bringing in the money.

Debt load is high, but income is far higher.

Considering how big tech has taken off like a rocket and powered everyone's portfolio for the last five months or so, many folks should be looking at rotating to the market's forgotten earners. While many may believe value investing is dead, it is possible to find names that have growth and value - and even better when they have a solid dividend. For folks who are looking for a company with all of these qualities in spades, look past Rite Aid (RAD) and Walgreens (WBA) to the other ubiquitous corner store - CVS (CVS).

Many have not looked past the debt taken on in the Aetna acquisition to notice, but CVS has transformed into quite the powerhouse business in the last few years. CVS Health and the expansion of MinuteClinics and HealthHUBs are leading to growth while bringing more folks into the pharmacy. Aetna has driven more traffic towards the stores, added more clients to MinuteClinic doctors and nurses, given the pharmacy more prescriptions to fill, all while the front of the store tempts folks to buy higher-margin snacks and things you would find in a typical corner store. And this doesn't even include the digital push CVS has been making, a push that has been proving quite successful!

CVS Health

(Image Source: CVS Investors Page)

Q2 Earnings Recap

Earnings results from Q2 in 2020 show that CVS Health brought in $65.34B in revenue, which is up roughly 3% year over year (YOY). This happened to beat the Street's expectations by $1.05B in the quarter. GAAP earnings per share were $2.26, which was also a beat of $0.72 per share. While analysts might be guessing low on purpose, the roughly 25% beat in EPS shows that the market still has not figured out what to think about CVS and its business lines.



(Image Source: Q2 Earnings Presentation)

CVS went on to raise full-year guidance in GAAP EPS, adjusted EPS, as well as cash flow from operations - which it bumped up $500M to $11-11.5B for the year. Operating income increased 40.5%. Adjusted operating income increased 32.2%. The financial statements show growth has happened even with the reduced front store sales due to adverse COVID impacts.

In the quarter, CVS generated $7.1B of cash flow. It has $7B in cash and investments on hand and $6B available through credit facilities. Debt was reduced by $2.75B, and $660M in dividends were disbursed to stockholders. Though the debt is still a large number, the reduction plan is going well as CVS plans to keep the dividend steady until it reaches a target leverage ratio in the low 3x range. (The company believes it will reach that in 2022).

New Business & Income

"We're a health innovation company that is built to meet the evolving needs of the millions we serve every day." President and CEO Larry J. Merlo (Emphasis added)

When CEO Merlo made this statement, it's easy to think he is just selling his company, after all every CEO tries the same thing. However, in this case, I believe Mr. Merlo to be quite accurate. Many folks hammered CVS as a doomed business the moment Amazon (AMZN) bought PillPack. The interesting thing is that even though Amazon may give CVS a run for its money in mailing prescriptions, it cannot match the services CVS offers. Amazon's interest also shows you how lucrative the future market is.

I would submit that Amazon's interest in PillPack proves the business model of CVS is sound and will grow. In fact, CVS and PillPack are basically going for the same goal; however, they are both attacking it from their own companies' strengths. Amazon is hammering for prescription sales at the "shop from home folks," knowing that many prescriptions are recurring purchases. CVS is hammering at the prescription sales folks as well while making shipping to home just as simple AND offering you your doctor's visit - which can be virtual or in person. If you do your visit in person, they have a chance to sell you more. CVS is leveraging its nearly 10,000 locations, which include a growing number of MinuteClinics and HealthHUBs to make your doctor's visit convenient - and using these centers to ship products directly to your home if you choose.

MinuteClinics are useful if you do not need a doctor, but could use a Nurse Practitioner (NP) or Physician Assistant (PA). Many visits can save money for both the provider (CVS) and the consumer when you see a NP or PA. (The typical MinuteClinic visit is roughly $99 or less, depending on what services are being used). This is increasingly important to save time and money for everyone including the NP or PA who can take more online appointments in less time. In fact, the AAMC and many other groups are showing that the U.S. will have a massive shortfall in medical professionals - to the tune of 46,900 to 121,900 by 2032. 21 states already show shortages of physicians. This makes simpler healthcare even more important.

Q2 showed that the system is working. Carepass app memberships are up 30% in the three months since Q1 results! Home delivery of prescriptions is up 500% from Q1. MinuteClinic virtual visits were up 750% YOY, showing that the tech side is producing results just at the right time when COVID keeps folks from wanting to venture out. If you do venture out, CVS offers you a nurse or doctor and everything else needed in one stop.

While on its campus, your Aetna medical coverage gives it a cut. Your MinuteClinic visit gives it a cut. Your prescription gives it a cut. Of course, it is hoping you purchase candy or other "necessities" while you are in store to give it even more margin.

As for shipping, just over a year ago CVS announced a partnership with UPS (NYSE:UPS) to create a UPS Access Point location inside CVS stores. This partnership adds another way CVS can get you in the door. You can use the CVS trip to pick up or drop off packages at over 6,000 CVS stores and you can assume that CVS gets a small cut of the business on each transaction as well.

CVS also announced the launch of "Health Advisor", which is expected to be available in 2021. This will provide chronic disease management services and its pilot tests show that it led to a reduction in unnecessary ER visits by roughly 12%. This saves the consumer money while keeping you under the CVS Health umbrella. CVS is also working to increase oncology care.

A Complete & Convenient Health Center

The end of Q2 shows 205 HealthHUB locations in 22 states. (HealthHUBs are larger than MinuteClinics). CVS expects to expand to reach roughly 1,500 locations with HealthHUBs by the end of 2021, suggesting a roughly 650% increase in stores that have the increased handling of more healthcare issues. (Even if it only completed 1,000 stores, it would still be up nearly 400%).

MinuteClinics and HealthHUBs are basically like urgent care clinics. Yes, some services that urgent care centers handle are not covered, but the most common and simple ones are covered by CVS. This allows folks to get a simple nurse visit for an injection, treatment, cough, etc. and pick up the subscription at the same location which saves time and money for the consumer. It also means that CVS gets a portion of each of these transactions instead of just the prescription. Of course, they have tons of higher margins to tempt you while you are in the store… urging you to spend more.

CVS is becoming a healthcare one-stop-shop, and it is the first one on the market. This is allowing CVS to provide lower-cost health services to consumers while making money off more transactions. YOY, the Health Care segment had a revenue increase of 6.1%, showing that the growth is happening, and the business model is working.

Key Risks

While a lack of execution on its business plans can slow growth, debt is the biggest risk to CVS. This seems to be why many folks are shunning the stock. CVS has an overall market cap of $85B, but a debt load of $63.5B. This is likely to steer most folks away, but digging in, you can see that things are not quite as bad as the shock value.



(Image Source: CVS Investors Site)

This quarter, CVS had $65.34B in revenue which easily allowed $660M to be paid in dividends, and $2.75B in debt was repaid. At current rate, even if CVS stuck with the same trajectory of debt payments, it would eliminate 2020 and 2021 debts that are due before mid-2021, roughly two quarters early. However, in this low interest rate environment, just about every company is refinancing debt to longer maturities at reduced rates. So should CVS decide to pay some debt and refi some, it will have ample opportunity to do so at favorable rates. The largest challenge in debt comes in 2023, but CVS has the funds to have that paid before 2023 even rolls around if it chooses.

Even though the debt load appears scary, the company is focused on paying it down and sales are increasing. Wisely, CVS chose to hold the dividend steady until it reaches a more favorable leverage ratio of 3x, which it expects to hit in 2022. The big key is even without any growth, CVS is more than able to handle the debt and push it down dramatically. As a side benefit, reduced debt will also increase profits by saving a few percent in interest each quarter.

The second key risk is political. If things ever move to a single-payer system, then CVS could have some challenges. In fact, political risk mighty keep CVS stock held back until after the election results are known. But considering the sheer size and scope of CVS, it is far more likely to share a part in the future of healthcare, then be pushed out of it. So I see a future for CVS Health no matter who resides in the White House.

The Future and Expected Outlook…

I believe the above info makes the case… namely that CVS is making a more modern/tech-savvy healthcare. In fact, it is leveraging its "old-school brick and mortar" store visibility and easy access to increase its margins for more and more transactions. CVS is using the Aetna insurance arm to increase stickiness of its consumers as well as take a cut of an ever-increasing pie.

Shipping with UPS at a location, CVS gets a cut. Visiting a doctor or nurse, CVS gets a cut. Picking up a prescription, CVS gets a cut. If you happen to get Band-Aids or candy while you are in the store, CVS gets another cut. It all adds up to a remarkable one-stop-shop for just about anything Healthcare related.

While politics may play a role, CVS Health has managed to increase revenues under the radar of most people. Its business is already being transformed to include high-tech and health while appearing like an everyday corner store. If you doubt this analysis, check out a MinuteClinic or HealthHUB for yourself… if you don't have one already, you will in the near future. And while you are there, don't forget to pick up some candy and add to the income that CVS is steadily generating year after year.