CVS Health's PBM Selling Season Remains Solid, Retail Grows

On Jun 8, we issued an updated research report on CVS Health CVS. While increasing demand for PBM (Pharmacy Benefit Management) and specialty pharmacy was a major growth driver for the stock, its dull retail performance over the last few quarters seems to have disappointed investors. The company carries a Zacks Rank #3 (Hold).

Shares of the company have outperformed the industry in the past three months. The stock has lost 4.3% compared with the 6.3% decrease of the broader industry.

CVS Health ended the first quarter of 2018 on a mixed note. While earnings were ahead of the Zacks Consensus Estimate, revenues lagged the same. However, the  top line’s year-over-year growth was driven by a strong Pharmacy Services segment, benefiting from the upside in the specialty services.

 

A strong 2019 PBM selling season was another favorable factor.  Notably, the company is already more than halfway through its 2019 renewals. The retention rate is currently in line with the rates it has witnessed over the last few years.

Despite a tough pricing competition, CVS Health currently gains momentum through high levels of service and execution, competitive pricing and a unique integrated model, which allows the company to provide differentiated products and services generating savings, better health outcomes as well as convenience.

Moreover, solid year-over-year Retail/LTC comparisons were encouraging. The company is presently moving toward achieving the completion of the Aetna deal. Per CVS Health, this landmark acquisition of the U.S. health insurance giant might introduce a vast change on the Healthcare landscape in the United States. Investors are hopeful about CVS Health’s earning of $750 million drawn from the near-term synergies via the Aetna transaction post its closure.

Meanwhile, the company’s commencement of this momentous $69-billion healthcare consolidation is keeping all analysts upbeat. On its successful culmination, CVS Health expects to reap $750 million with low to mid-single digit accretion in the second year post the close of the buyout.

On the flip side, the company’s highly competitive retail pharmacy business is a big concern as it faces some stiff rivalry in the pharmacy segment. This is because availability of low-cost pharmacy options and other retail businesses continue to add pharmacy departments in the portfolio. Particularly, discount retailers have made substantial inroads in gaining a major market share. This apart, CVS Health delivered some sluggish numbers within the retail Long Term Care business in the recent past. Per the company, this decision to restrict itself from participating in the TRICARE network and many fully-insured prime networks was due to the negative impact on Pharmacy sales and script comps.

Key Picks

A few better-ranked stocks in the broader medical sector are Intuitive Surgical ISRG, Illumina, Inc ILMN and Amedisys, Inc. AMED. While Intuitive Surgical and Illumina sport a Zacks Rank #1 (Strong Buy), Amedisys carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Intuitive Surgical has an expected long-term earnings growth rate of 12.1%.

Illumina expects long-term earnings growth of 20%.

Amedisys has an expected long-term earnings growth rate of 17.5%.

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