CVS Health Group Has an Amazing Growth Opportunity
Skyrocketing health care costs and a flood of new competitors suggests the health care market is ripe for change. CVS Health Corp (NYSE: CVS) recently said its $69 billion buyout of Aetna ( AET) is on track to close by the end of the year, and analysts say the Aetna-CVS combo could create a huge growth opportunity for CVS.
According to Bank of America analyst Michael Cherny, CVS will likely be looking to transform its business model. The first step in that process, Cherny says, will be for CVS to expand its physician service offerings in its MinuteClinics, including beefing up its current suite of laboratory services.
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Today, CVS has MinuteClinic walk-in clinics in roughly 12 percent of its 9,800 retail locations. MinuteClinics currently offer roughly 40 percent of the health care services that patients can get at a primary care facility.
"In our view, these services have the ability to expand CVS' store traffic by millions annually, which could provide some stability to front-store sales during a time when the company transitions from a pharmacy to a health care service provider," Cherny says.
Just by shifting annual physicals to MinuteClinics alone, Cherny estimates CVS could add between $45 million and $145 million in gross profits. For every 100 stores CVS expands its lab testing services, he estimates CVS could add another $45 million in gross profits. In addition, he says primary care and lab work could increase annual store traffic by about 10 million visits per year.
In the longer term, Cherny says its robust free cash flow will give CVS the flexibility it needs to expand its health care network and evolve its business further.
"Over the intermediate to long-term, we expect CVS would look to purchase/partner with physician groups across different specialties to build out the CVS-provider network outside of the four walls of the retail pharmacy," Cherny says.
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Slowing growth in CVS's core retail business has compressed the stock's earnings multiple well below its five-year average. Cherny says a pivot to health care services and a subsequent uptick in store traffic and earnings growth could lead to multiple expansion and significant upside for the stock.
Bank of America has a "buy" rating and $88 price target for CVS stock.
Wayne Duggan is a freelance investment strategy reporter with a focus on energy and emerging market stocks. He has a degree in brain and cognitive sciences from the Massachusetts Institute of Technology and specializes in the psychological challenges of investing. He is a senior financial market reporter for Benzinga and has contributed financial market analysis to Motley Fool, Seeking Alpha and InvestorPlace. He is also the author of the book "Beating Wall Street With Common Sense," which focuses on the practical strategies he has used to outperform the stock market. You can follow him on Twitter @DugganSense, check out his latest content at tradingcommonsense.com or email him at wpd@tradingcommonsense.com.