Ageing population in the U.S. presents attractive growth opportunities for retail pharmacy companies, like Walgreens Boots (NASDAQ:WBA) and CVS Health (NYSE:CVS). In the current industry environment, CVS Health is making correct strategic decisions and executing its strategy well. The company’s PBM business will continue to fuel growth for the retail segment in the upcoming years. Moreover, the company will benefit from synergies, which will support its growth. Furthermore, the company will continue to share success with shareholders through cash returns, which are backed by its strong cash flows. Also, it can further create value for shareholders by undertaking strategic acquisitions. The stock’s current valuations also remain attractive as it is trading at a forward P/E of 13.5x, at a 15% discount in contrast to WBA valuations.
Catalysts
CVS is positioned well in the industry to benefit from new reimbursement models and changing market dynamics. The company’s strategy to integrate the PBM business with the retail pharmacy will support its long-term growth. The company will gain traction in the marketplace and experience sustainable growth in the future years as a result of its integrated business model and unique offerings like pharmacy advisor and specialty connect. The company is correctly increasing focus on specialty health business, which will augur well for its long-term growth, as 3 million people in the U.S. require specialty services. The company has been executing its strategy well, which is evident from its strong financial performance. The company’s revenues for 2Q16 grew by 18% YoY. Also, the company reported EPS of $1.32 for the quarter, beating consensus by $0.02. The company now targets EPS of $5.81-$5.89 for 2016, up from the previous target of $5.73-$5.78.
The company has been doing well to add new PBM business, which will help to address investors’ concerns regarding loss of the PBM contracts in the first half of 2016. CVS has done well in the recent years by adding new businesses to strengthen its PBM business and stay competitive in the industry. CVS managed to add $4.6 billion worth of net new PBM business in the ongoing season so far. The company has a strong history of securing new contracts, as it successfully added almost $30 billion of net new PBM business since 2011. Furthermore, despite the recent contract losses, CVS has completed 75% of renewals for 2017 at a healthy retention rate of 97.5%. Also, the extension of the federal employee program (NYSEARCA:FEP) retail and mail contracts until January 2019, which represent annual sales of $6 billion, will augur well for CVS business risk profile.
Also, synergies from the acquisitions of Omnicare and Target’s (NYSE:TGT) pharmacies, and its cost savings measures will result in profit margin expansion. As a result of cost reduction measures and improvement in working capital, cash flows grew by 135% for CVS in 2Q16. Moreover, growth in the PBM business allowed the company to improve its cash conversion cycle by 0.4 to 23.5 days. The company expects to generate cash flows of $6.3 billion to $6.6 billion in 2016. CVS has creating value for shareholders by using its cash flows to repurchase shares and pay dividends. I believe the company can use its strong cash flows to undertake strategic acquisitions, which will not only create value for shareholders but also strengthen its position in the market.
As the company will continue to add new net PBM business and improve its cost structure, the stock valuations will expand. Also, if CVS opts for more strategic acquisitions, it will bode well for the stock price. Currently, the stock’s valuations remain attractive as it is trading at a forward P/E of 13.5x, versus WBA’s forward P/E of 16x.
Summation
The company’s integrated business model will bode well for its long-term growth. CVS growth in the future years will be driven by the PBM business and retail pharmacy. Also, the company’s recent acquisitions and cost reductions efforts will support its growth. CVS will continue to share its success with shareholders through share repurchases and dividends. I believe the company can create value for shareholders and strengthen its position in the market by undertaking strategic acquisitions. Moreover, the stock valuations will expand as the management will continue to execute its strategy and benefit from the available growth opportunities. The stock is trading at a forward P/E of 13.5x, in comparison to WBA’s forward P/E of 16x.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Article source: http://seekingalpha.com/article/4007011-look-term-growth-looks-secure-cvs-health