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Quick Summary

CVS is one of the largest integrated health companies in the United States. The business consists of 3 segments. The largest is Pharmacy Services, at 46% of total revenues and 34% of operating income. This is CVS's pharmacy benefits management (PBM) unit, acting as a "middleman" between pharmacies and insurance companies to secure volume discounts and rebates from drug manufacturers, and coordinate drug deliveries. The PBM unit processed over 2.1 billion pharmacy claims in 2020. This unit was added with the purchase of Caremark in 2007. The second largest is Retail (29% of sales, 34% of profits). This most visible unit consists of CVS's 10,000 location drug store chain, in addition to its MinuteClinic and HealthHub point-of-care operations in over 1,000 of these stores. CVS pharmacies filled over 1.5 billion prescriptions in 2020. Finally is the Health Care Benefits unit (24%; 32%), added with the Aetna purchase in 2018. This is a full health insurance offering with over 23 million members in the U.S. CVS aims to provide a fully integrated health solution for customers to successfully manage health care expenses.

Does The Company Have Rising and Recurring Revenues?

SOMEWHAT. CVS is a large firm in competitive but mature and stable market segments. This will make out-sized organic growth difficult. While the firm's 3-year annual revenue growth rate is 13.3%, this is largely due to the acquisition of Aetna in 2018. Organically, the firm is seeing sales growth closer to 4%, which is about in the range we expect going forward. All 3 segments benefit from reliable and recurring revenues, as drug prescriptions and health care coverage are necessary expenses that are recession-proof and "inevitable". The PBM unit operates with a retention rate over 95%, health insurance companies regularly retain 85-90% of members year-to-year, and the retail business supplies immediate need products, protecting it somewhat from the e-commerce trend.

Does The Company Have Durable Competitive Advantages?

SOMEWHAT. CVS' primary moat stems from its ECONOMIES OF SCALE, particularly in the PBM and retail segments, and also from the vertical integration, it provides to consumers. The PBM industry is down to 3 major players (CVS, UnitedHealth, and Cigna), with CVS being the largest at around 30%. With its low margins, scale is critical to success, and new competition is unlikely. In retail, CVS' 10,000 store base and 25% market share is #1 in the U.S. This gives the firm better leverage on fixed costs and preferred lessee status, which has contributed to the marked decline in small pharmacies over the past 20 years. Aetna has few notable stand-alone advantages (it is a lagging #3 in U.S. health insurance membership), but the integration of insurance, PBM, and retail pharmacy unit allows CVS to claim modest NETWORK EFFECT and SWITCHING COSTS for its consumers, particularly in certain geographies where CVS is the dominant player. While all of these should allow CVS to maintain its competitive position, its biggest risk is the role the government plays in setting health care reimbursements. A forced reduction in what the government will pay for health care or drugs could have a large effect on all firms in this segment, including CVS.

GreenDot Rating: YELLOW

CVS remains a YELLOW (somewhat attractive) business. It has a solid competitive position in a stable, recession-proof industry that should allow it to deliver modest but reliable shareholder gains in the years ahead. However, there is not much organic growth potential, and a Democratic-controlled federal government always represents a risk to reimbursement rates and coverage. CVS represents an "ok" investment candidate, but there are better options for new money.