Change is in the air for CVS Health Corporation (CVS -1.62%). The large pharmacy benefits manager and drugstore chain recently switched its name from CVS Caremark. A new identity as a "pharmacy innovation company" and a major focus on positioning itself as a leader in healthcare are also part of the package.
But could a negative change be in store for CVS also? The stock has been on a roll for quite a while. Some might say that CVS's stock is ripe for a pullback. Here are three reasons that view could be right.
Source: The Motley Fool
1. A bumpy tobacco road
CVS announced earlier this year that it planned to yank all tobacco products from its stores by October. The company actually achieved that goal one month earlier than anticipated. Despite estimating that the move could cost $2 billion in lost revenue per year, the no-tobacco decision hasn't hurt CVS' stock so far.
The question is whether shares will hold up when financial results actually reflect those lost sales dollars. It's easy for investors to shrug off a couple of billion dollars in revenue before the impact is truly felt. When the lower numbers hit, there could be a different story for CVS stock.
There's also the little detail that the $2 billion figure is only an estimate. If the actual effect of not selling tobacco products turns out to be even larger, expect shares to drop.
2. Margin trading
Although CVS posted a healthy 18.3% gross margin last quarter, the number reflected a decline of 40 basis points compared to the same quarter in 2013. Like its major rivals, CVS faces reimbursement pressures. There is also another factor for the company's drop in margin, though.
CVS' pharmacy benefits management, or PBM, business is growing faster than the retail pharmacy side of the business. That's not a bad thing, except that the PBM segment has lower profit margins than the retail segment. And the relatively high profit margin front store business is where CVS could feel pain from the discontinuation of carrying tobacco products.
We'll know more in October when CVS posts its quarterly results. Should the mix shift to the lower-margin PBM business picking up steam, the company might not compare well against rival drugstore chains like Walgreen and Rite Aid in the eyes of investors. Decreasing margins could lead to increasing trading -- with more intensity for sellers than buyers.
3. The fall season
Shareholders have enjoyed a really good ride with CVS's stock. Shares are up 15% so far this year. The stock soared by 76% over the last two years. All good things eventually come to an end, though. If investors begin thinking that CVS' momentum can't last and decide to take profits, they'll contribute to the end of the stellar run.
A glance at the trailing-12-month, price-to-earnings multiple over the past several years could reinforce a view that CVS's stock could be reaching a ceiling. Valuation is near its highest level in five years.
CVS P/E Ratio (TTM) data by YCharts
This by itself doesn't mean that CVS is destined to fall, of course. However, any disappointment in financial results combined with a valuation near multi-year highs could cause shares to drop.
Changing for good
These aren't the only factors that could contribute to potential problems for CVS' stock. Overall market headwinds stands out as another likely culprit. That being said, I think that the long-term outlook is quite positive for CVS Health.
The company's focus on being a healthcare leader seems to be a smart move. CVS leads its rivals Walgreen and Rite Aid in the number of in-store medical clinics. It stands to benefit from higher numbers of Americans obtaining Medicaid or private insurance coverage as a result of health reform. Changes are in the air for CVS Health, but my take is those changes are for the good.
