This Health Care Titan May Not Stay 'On Sale' for Long
Regular readers will recognize the term "Global Elite"...
Here at Stansberry Research, we use this phrase to describe the best companies in the world. They dominate their industries – they have fortress-like balance sheets and powerful, well-known businesses.
We're always looking for buying opportunities in these kinds of businesses. When they fall 10%, we get interested. When they fall by more than 20%, we really get interested. And that's what we're seeing from a Global Elite health care business right now...
CVS Health (NYSE: CVS) is a titan of the health care industry.
It's one of the most "vertically integrated" health care companies out there. This means that it has access to every part of the health care "chain." Let's dive into each of CVS's business segments...
The first part of CVS's business is its retail division. This segment is what many people think of when they think of CVS. It fills prescriptions for customers and sells basic products like gum, over-the-counter meds, and beauty supplies. The retail business makes up about 29% of CVS's sales.
The next part of CVS's business is its pharmacy benefit manager ("PBM") segment. PBMs act as middlemen between drugmakers and insurance companies, negotiating lower prices and handling reimbursements. Having an in-house PBM gives CVS big ties to insurance and a major say in how the pharmaceutical industry works. This part of CVS's business accounts for 48% of sales.
Then, in 2018, CVS added a health insurance business with its $70 billion acquisition of managed-care company Aetna. This segment collects premiums, and then pays them out in claims. It makes up the final 23% of CVS's sales.
The Aetna acquisition is what completed CVS's transformation into a one-stop shop for health care. Now it can make a little profit from your insurance plan... a little from the PBM business... and a little when you go into the store. This integration means that CVS can better control its costs and quality of care.
And the company has been expanding its reach. In 2000, it had about 4,000 locations. Today, it has nearly 10,000... Around 70% of Americans live within three miles of a CVS store.
CVS's recent earnings report shows the strength of this diverse business model.
Earnings per share ("EPS") came in at $2.64 versus the $1.91 estimate. Revenue for the quarter was $65.3 billion, beating the expectation of $64 billion.
And CVS is one of only a few companies providing better-than-expected forward guidance. As of July 31, 51 S&P 500 companies had withdrawn or decided not to give full-year 2020 forecasts, according to FactSet. And only 23 others had provided guidance above their previous forecasts.
For the full year, CVS forecasts EPS of $7.14 to $7.27. That's better than its previous guidance of $7.04 to $7.17 and the Wall Street estimate of $7.14.
Revenue in its retail business grew by 1% in the quarter. The company attributed this growth to increased prescription volume. And revenue in the PBM segment was essentially flat on a year-over-year basis.
But the managed-care business is taking off...
CVS's Health Care Benefits segment reported a jump of 141% in adjusted operating income in the second quarter. This was largely due to folks putting off their non-emergency medical procedures because of the coronavirus pandemic. CVS reported a medical benefit ratio, also called a medical loss ratio ("MLR"), of 70.3% in the quarter – down from an already-impressive 84% in the same quarter last year.
The MLR is the amount paid out in claims divided by the total premiums collected. So a lower MLR means a managed-care company is more profitable because it's taking in more in premiums than it's paying out in claims. And that's a great sign of a strong managed-care business.
The sharp decline in MLR for CVS is unprecedented in today's health care industry. As the pandemic continues, people will likely keep holding off on elective procedures to avoid hospitals. This should continue to boost CVS's managed-care business in the near term.
But investors aren't catching on just yet. From its 2020 highs set in January, CVS fell about 30%. But even though it has rebounded since, it is still 15% below its 2020 highs set in January. That means today could be a rare buying opportunity in the health care giant.
CVS is one of the most diversified health care companies out there. And it's a Global Elite business. So CVS may not be "on sale" for much longer...
Sometimes investing is simple.