Wall Street’s first quarter earnings results suggest financial guidance and forecasting is now voluntary. With many reports still to come, over 20% of publicly traded companies chose to withdraw all profitability and sales projections. Understandably so. The Coronavirus pandemic allowed severe health, and financial hardship to blossom, leading to uncertain futures for many. Through this all, health conglomerate CVS (CVS 0.50%) maintained financial targets for the year, confirming to shareholders a very compelling valuation.
Based on their first quarter results, CVS trades under 9x the midpoint of their profit projections. The stock changes hands at a strikingly low free cash flow multiple under 8 times the midpoint estimate. Even more captivating, CEO Larry Merlot coordinated growth in revenue and profit at 8% and 15% respectively for the quarter. A caveat, this was aided by transitory supply hoarding. Even after accounting for this transitory situation, however, Merlot showcases growth comfortably pacing an S&P 500 with negative quarterly top and bottom-line growth thus far.
While these fundamentals in isolation are mouthwatering, good value alone does not orchestrate stock gains. A company’s long-term viability is equally important. Pharmacies and the rest of the brick and mortar retail cohort face an existential threat to viability in the form of e-commerce. Amazon and several startups continue to actively build out prescription delivery services.
Merlot’s company partnered with UPS to develop the same service which grew exponentially this quarter. Regardless, brick and mortar is increasingly threatened by the internet. Failure to appropriately react could render a pharmacy chain obsolete. I am confident CVS is taking appropriate action to diversify their business and endure this new competition going forward.
Why?
Over the past several months, CVS has embarked on a concept transformation of its retail footprint. Given the name “HealthHubs”, converted stores will now function as a service center. Ranging from blood work to chronic illness checkups, new stores will be able to replace routine visits to the doctor’s office as a community health center for affordable consultation. None of these services can be emulated by e-commerce.
For the roughly 30 million Americans without health insurance, and for countless others, HealthHubs fill a huge need at a lower cost than going to the doctor. CVS being within two miles of most American’s will eventually make these vital services more available. So far, the program rolled out in Tampa Bay and in parts of Texas. The results? Same store sales outperforming old store models, rapid adoption of Hub services, and even increased sales for traditional product lines like toiletries. While the virus forced CVS to slow expansion, HealthHubs are working and help immensely in shifting CVS to a business model more shielded from competition.
Image Source: NPR
To enhance the value proposition of these HealthHubs still further, CVS purchased the insurance company Aetna in 2018. The vertical integration and associated synergies allow Aetna to access CVS’s vast customer base while providing care options to them at a lower price than previously possible. Ranging from filling prescriptions to now offering services provided by the HealthHubs, CVS has actively used the purchase to widen their moat via great value for consumers. To sum it up, the Hubs enable CVS to serve a wider range of needs that e-commerce cannot, while Aetna allows them to do so more cost effectively.
Merlot fixates on not leaving any holes (or what he calls white space) in the business for competition to interrupt. The new stores, and Aetna work wonders to plug potential gaps. The pandemic more explicitly revealed another potential gap by inducing accelerated remote living trends.
For CVS’s world, telehealth, or remote consultation, is the answer. Merlot’s company boasted 600% growth in their telehealth consultations during quarter one this year. That is not a typo: stay-at-home orders translated into skyrocketing demand for the service. Other players like Teladoc exist in the new field, but there is plenty of growth for all to enjoy. Mind-boggling growth from this segment of the business depicts their strong capacity to gain from shifts in behavior. Just like the services offered at their new stores, this growth is not threatened by e-commerce.
For most of retail, the internet is a very real threat to existence. For CVS however, smart acquisitions, the intriguing HealthHub project, and Telehealth growth offers comfortable protection. The stock could inexplicably go lower in the near term, as Coronavirus continues to shake investors. If it does, I would use that as an opportunity to add to my position, as this company is nicely set up for a long, long time.
