CVS Health (CVS) Under Fire: How Will the Stock React to Pharmacist Backlash?

Drugstore chain and pharmacy benefits manager CVS Health Corporation (CVS), with a market cap of $91.62 billion, has managed to navigate post-pandemic challenges with remarkable adeptness and resilience.

However, the specter of questionable working conditions looms large over pharmacists nationwide. Lengthy working hours, staff shortages, and an escalating workload often leave scant room for proper patient care, potentially leading to severe repercussions for pharmacists and their patients.

Waves of protest against what they perceive as substandard working conditions and unsafe patient care surged among CVS pharmacists in Missouri last Wednesday. About 22 CVS locations in Kansas City and pharmacies inside Target (TGT) stores were temporarily shut down late last week when pharmacists, supported by staff and additional healthcare personnel, raised their voices against overworking, arguing it compromised patient safety.

At the core of the matter lies understaffed pharmacies, which impede pharmacists’ ability to give patients adequate attention. This threatens the standards of care and advances the risk of medication errors. The non-unionized pharmacists called for limits on administered vaccine quantities, improved scheduling, and additional modifications.

In the face of scarce support and resources, many pharmacists cannot deliver optimal patient care. The protest led by CVS pharmacists aims to highlight these pressing issues and chart the course for a more sustainable, patient-oriented healthcare structure that prioritizes the well-being of pharmacists and their patients.

The Impact So Far

CVS shares tumbled 2.2% on Wednesday following the announcement of a second walkout by CVS pharmacists in Kansas City, MO, within a week.

Despite the corporation's apology for the delay in addressing their grievances and assurances of procedural improvements, recurring strike actions could detrimentally affect the quality of service delivery and impede its capacity to provide critical healthcare to consumers amid escalating COVID-19 cases and increased testing needs nationally.

The ongoing walkout might potentially cause turbulence in the COVID-19 booster shot rollout. Impact assessment remains uncertain as CVS pharmacists have not established the protest's duration nor its corollary effects on Target pharmacy booths and standalone drugstores.

Amid severe staffing constraints, pharmacists struggle to manage the soaring demand for COVID-19 and seasonal flu vaccinations and regular prescription needs. Consequently, customers should anticipate possible delays.

The series of protests have culminated in diminished customer satisfaction and erosion of consumer confidence, compelling some to transition to alternate pharmacy providers due to the ongoing challenges at CVS.

How CVS Might Be Affected

In the ongoing scenario, if the walkout continues, it risks not only eroding customer trust and precipitating a downward slide in sales, but it could also taint the company's reputation and brand value. This situation might indicate ineffective management, strained labor relations, and a compromised corporate culture.

Trapped in this crisis, CVS' ability to surpass rivals and its market dominance within the healthcare sector could face significant obstacles. The walkout could inflate the financial burden on CVS due to increased costs and liabilities related to potential legal ramifications arising from contract breaches or substandard practices.

Furthermore, the company’s operational efficiency and productivity are at stake as disruptions in supply chains and work processes threaten its smooth operations. These factors could collectively destabilize the company's financial stability and outlook. If unresolved over extended periods, the walkout could lead to substantial wealth erosion for shareholders.

However, amid this predicament, a few silver linings should be considered. Here are additional elements that could potentially shape CVS' trajectory in the forthcoming months:

Recent Developments

CVS, holding its position as America's largest drugstore chain, has pledged allegiance to the rising trend of biosimilars with the inception of its wholly-owned subsidiary, Cordavis. This new entity aims to liaise directly with manufacturers to commercialize or co-produce biosimilar products, reflecting CVS' strategy to mitigate drug costs for consumers by developing biosimilar medications and conducting direct negotiations with pharmaceutical companies.

This development signals promise for consumers and investors, as CVS harbors both an industry opportunity and the extensive scale required to compete effectively with eminent drugmakers.

The repercussions of the pandemic have catalyzed a paradigm shift in the U.S. drugstore industry, mainly characterized by consolidation trends. As we progress beyond this global crisis, traditional retail has faced challenges regaining traction, particularly in comparison with more robust sectors. Amid this scenario, drugstores have emerged as epicenters for evolutionary shifts and potential mergers.

CVS has recently stepped up its strategic initiatives by actively seeking partnerships, pursuing growth, and implementing a consolidation plan. As a result of a policy adjustment initiated in 2021, hundreds of CVS branches are set for closure as part of the company's cost-cutting measures to pre-empt potential losses.

In late 2021, the organization confirmed that it was assessing changes in population dynamics, consumer purchasing trends, and projected health requirements to assure the optimal placement of its stores for both customers and corporate viability.

CVS plans to lessen store saturation in certain areas as part of these efforts, leading to the shuttering of roughly 300 stores annually over the next three years. This strategic decision came as CVS aimed to allocate resources better and adjust to changing customer behaviors. The company anticipates that this course of action will close nearly 900 locations by the end of 2024.

Robust Financials

CVS’ total revenues increased 10.3% year-over-year to $88.92 billion in the fiscal second quarter that ended June 30, 2023, with product revenue rising 6.6% year-over-year to $60.54 billion. The company reported an adjusted operating income of $4.48 billion. Moreover, its adjusted EPS amounted to $2.21.

Attractive Valuation

CVS’ forward EV/EBITDA of 7.92x is 36.8% lower than the 12.54x industry average. Its forward EV/EBIT and Price/Sales multiple of 8.99 and 0.26 are 44.1% and 93.3% lower than the industry averages of 16.07 and 3.86, respectively.

Robust Growth

CVS’ revenue grew at CAGRs of 8.7% and 12.6% over the past three and five years, respectively. In addition, its total assets grew at 2% and 13.4% CAGRs over the past three and five years, respectively.

High Profitability

CVS’ trailing-12-month EBITDA and EBIT margin of 5.42% and 4.17% are 3.4% and 896.2% higher than the 5.25% and 0.42% industry averages. Moreover, its trailing-12-month levered FCF margin of 5.33% is significantly higher than the industry average of 0.26%.

Growing Institutional Ownership

CVS’s robust financial health and fundamental solidity make it an appealing investment opportunity for institutional investors. Notably, several institutions have recently modified their CVS stock holdings.

Institutions hold roughly 77.9% of CVS shares. Of the 2,413 institutional holders, 1,090 have increased their positions in the stock. Moreover, 118 institutions have taken new positions (9,005,031 shares).

Price Performance

Even though CVS’ shares have plunged 28.2% over the past year, over the past three months, the stock gained 1.6%. Moreover, shares of CVS have gained 3.7% over the past month.

Wall Street analysts expect the stock to reach $91.53 in the next 12 months, indicating a potential upside of 31.2%. The price target ranges from a low of $80 to a high of $110.

Favorable Analyst Estimates

For the fiscal third quarter ending September 2023, analysts expect CVS’ revenue to increase 9% year-over-year to $88.43 billion, while its EPS is expected to come at $2.13. Moreover, for the fiscal year ending December 2023, analysts expect CVS’ revenue to increase 9.1% year-over-year to $351.77 billion, and EPS is expected to come at $8.60.

Furthermore, it has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.

Bottom Line

CVS stands in a formidable financial position, strengthened by optimistic analyst projections, attractive valuation metrics, solid profitability, and notable progress potential. The company also possesses additional commendable characteristics.

As proof of CVS’s commitment to rewarding its investors, it boasts an unbroken track record of paying dividends for the past 25 years. The firm recently announced its forthcoming quarterly dividend of $0.605 per share on common stock, payable to the shareholders on November 1, 2023.

It pays a $2.42 per share dividend annually, translating to a 3.39% yield on the current share price. Its four-year average dividend yield is 2.70%. The company’s dividend payouts have grown at a CAGR of 5.8% over the past three years and 3.4% over the past five years.

CVS' dividends seem well-covered, signaling prudent and efficient reinvestment of earnings by management. As of June 30, 2023, the company recorded retained earnings amounting to $58.87 billion, which can be utilized to invest in furthering its growth opportunities.

Nonetheless, the recent protests underline the urgent need for revamping the pharmacy industry with a renewed focus on pharmacist and patient safety. It is crucial for the management to promptly respond to these concerns to maintain stability within the company and optimally leverage ongoing industry trends.

Should The Omicron Variant Be A Concern For Investors?

While Americans were celebrating the Thanksgiving Holiday, the rest of the world dealt with the newest Covid-19 variant. The Omicron variant of coronavirus, first identified in South Africa, has been reportedly spreading in parts of Europe for days before it was identified in southern Africa.

On December 1st, the first confirmed US case of Omicron coronavirus variant was detected in California. In a White House news briefing, Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, said the case was in an individual who traveled from South Africa on November 22 and tested positive for Covid-19 on November 29.

As of the end of November, the variant was already found in 20 countries, and governments around the world were already implementing lockdowns and travel restrictions.

These decisions where being driven by the fact that the Omicron variant was substantially different. With about 50 mutations from the original coronavirus, which started the pandemic, and about 30 mutations compared to even the highly contagious delta variant that has swept around the world. However, scientists don't know if the variant is actually more contagious or more deadly than any previous variants.

Many have been calling this an overaction, while others say the lockdowns and travel restrictions are adequate steps to protect others. Regardless these are difficult decisions for the politicians, and there will inevitably be those talking heads on the T.V. bashing the leaders regardless of their decisions. Part of this circus helps build fear and anxiety in most people, leading to fear and anxiety within the stock market.

The worst single day for the U.S. stock market in 2021 was Friday, November 25, the day following Thanksgiving, a shortened trading day, and of course, the day after the world found out about the new Omicron variant. The following few trading days were similarly volatile, with the market bouncing higher and then lower, despite any new real tangible information about the true nature and danger of the Omicron variant being known.

So, should this new variant be a real concern to investors? Continue reading "Should The Omicron Variant Be A Concern For Investors?"

Q4 Approaching: Markets In Rarified Air

The bulls have been trampling the bears in a near orderly uptrend for the past ~10 straight months now. The bear thesis couldn’t have been more wrong despite the markets facing a trifecta of rising interest rates, an unknown delta variant backdrop, and the Federal Reserve tapering later this year. The major indices are in unprecedented territory breaking through all-time high after all-time in what seems to be a daily occurrence. With Q4 2021 coming into the picture, the S&P 500 is up over 20% and places the market in rarified air.

The S&P 500 index recorded its 53rd record high on September 2nd, which makes 2021 the 5th-ranked year over the past century in terms of record highs, per Bank of America. This significant milestone has been achieved with four months remaining in 2021. The other major indices, such as the Nasdaq and Dow Jones, are showing similar patterns as measured via QQQ and DIA, respectively.

Stocks are overbought and at extreme valuations, as measured by any historical metric (P/E ratio, Shiller P/E ratio, and Buffet Indicator). Valuations are stretched across the board, with the major averages at all-time highs and far away above pre-pandemic highs.

Figure 1 – Adopted from Buffet Indicator analysis via Current Market Valuation

When the Fed Taper and Inflation Hit

As the Consumer Price Index (CPI) continues to push higher in conjunction with better-than-expected employment numbers, the Federal Reserve may be compelled to finally not only entertain the idea of raising rates but implement a rate increase. Although interest rate risk disproportionally impacts fixed-income investments such as bonds and annuities, stocks will undoubtedly be impacted as well. This is especially true for highly leveraged companies such as tech and super-charged growth companies. Even the prospect of higher rates hit the Nasdaq in March for a sharp decline, albeit that decline was quickly erased. This is a case in point of how quickly the markets can turn negative with the hint of rising rates which may be exacerbated in an already very frothy market. Continue reading "Q4 Approaching: Markets In Rarified Air"

Do We Really Need More Stimulus?

As we speak, Republicans and Democrats are still wrestling over another coronavirus stimulus package. Everyone wants one, we’re told, and the economy needs one.

Don’t start spending that stimulus check just yet.

Despite what they claim, Democrats don’t really want a deal, no matter how big, at least not until after the election. Do you really believe that Nancy Pelosi and Chuck Schumer want to allow President Trump to play Santa Claus and send out $1,200 checks to American voters right before the election? Needless to say, the president would just love to have his name on those checks.

So don’t count on another stimulus package until after the election, if then. It’s a valid question of whether the country really needs another one. But never fear, the Federal Reserve will step in where Congress fears to tread.

At its September 15-16 monetary policy meeting – the last one before Election Day – the Fed updated and revised its prognosis upward for the U.S. economy, finally catching up with many other analysts and some of its own regional banks who are forecasting a much brighter picture than Fed Chair Jerome Powell and many other Fed officials have been painting over the past couple of months.

The Fed now expects U.S. economic growth to be negative 3.7% for this year, a big upgrade from its negative 6.5% projection in June. It also expects positive growth of 4.0% next year (down from 5.0%), 3.0% in 2022 and 2.5% in 2023. Regarding unemployment, it expects the jobless rate to fall to 7.6% this year from its June projection of 9.3%, declining further to 5.5% next year, 4.6% in 2022, and 4.0% – i.e., full employment – in 2023. Continue reading "Do We Really Need More Stimulus?"

Seeing Beyond The Black Swan Event - Part 2

And just like that, the S&P 500, Nasdaq, and Dow Jones hit their all-time highs, and the COVID-19 market sell-off had been erased. Just before the COVID-19 pandemic struck the markets, Ray Dalio was recklessly dismissive of cash positions, stating "cash is trash." Even Goldman Sachs proclaimed that the economy was recession-proof via "Great Moderation," characterized by low volatility, sustainable growth, and muted inflation. Not only were these assessments incorrect, but they were ill-advised in what was an already frothy market with stretched valuations prior to COVID-19. I'm sure Ray Dalio quickly realized that his "cash is trash" mentality, and public statements were imprudent. The COVID-19 pandemic has been a truly back swan event that no one saw coming. This health crisis has crushed stocks and decimated entire industries such as airlines, casinos, travel, leisure, and retail with others in the crosshairs.

The S&P 500, Nasdaq, and Dow Jones shed over a third of their market capitalization at the lows of March 2020. Some individual stocks lost over 70% of their market capitalization. Other stocks had been hit due to the market-wide meltdown, and many opportunities were presented as a result. Investors were presented with a unique opportunity to start buying stocks and take long positions in high-quality companies. Throughout this market sell-off, I started to take long positions in individual stocks, particularly in the technology sector and broad market ETFs that mirror the S&P 500, Nasdaq, and Dow Jones. It was important to put this black swan into perspective and see through this crisis on a long term basis while viewing COVID-19 as an opportunity that only comes along on the scale of decades.

Most Extreme and Rare Sell-Off Ever

The abrupt and drastic economic shutdown and velocity of the U.S. market's ~30% drop within a month bring parallels to the 1930s. This sell-off was extreme and rare in its breadth, nearly evaporating entire market capitalizations of specific companies. The pace at which stocks dropped from all-time highs was the fastest in history. The major averages posted their worst week since the financial crisis (Figures 1 and 2). The Dow had its worst month since 1931, and the S&P had its worst month since 1940. Continue reading "Seeing Beyond The Black Swan Event - Part 2"