CVS: The Medicine Your Portfolio Needs?

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.

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