It's been a ho-hum kind of year so far for CVS Health Corporation (NYSE:CVS) stock. Shares are down a little year to date, despite the pharmacy services giant reporting good news in each of its first two quarters. But CVS could be on the verge of making shareholders happier. Here are three reasons why CVS Health stock could rise.
1. Timing factors
In the first quarter, CVS' pharmacy benefits management (PBM) business delivered profits that topped the company's expectations. Ditto for the second quarter. But CVS Health thinks that the second half of the year will be even stronger than the first half.
There are several timing factors that should help CVS' financials in the next couple of quarters. The company stands to benefit from the introduction and timing of generic drugs' "break-open periods" in the second half of 2016. Break-open period refers to the 12 months from the initial point where there are three or more viable suppliers for the generic version of a drug.
CVS Health should also see higher Medicare Part D profits in the back half of 2016. However, the third quarter might not be as strong as the fourth quarter on this front. CVS Health's experience is that the Medicare Part D risk-sharing corridor tends to provides less protection during the third quarter.
Another timing factor that should work to CVS Health's advantage is the resolution of several tax items. CVS expects the tax benefits to hit in fourth quarter, but there is a possibility that they could positively impact the company's third-quarter results.
2. Strong selling season
The company announced in August that its PBM selling season is again going very well. CVS has already locked down around three-quarters of its renewals for 2017, with an overall retention rate of 97.5%.
As of the end of the second quarter, CVS Health had sold around $7.4 billion in 2017 contracts, including $4.6 billion in net new business. Granted, some of the wins came pretty easily. Aetna (NYSE:AET) inked a 12-year deal with CVS Health's PBM unit back in 2010. In 2013, Aetna acquired Coventry Healthcare. That acquisition is now benefiting CVS Health as Coventry's PBM business transitions over. Still, though, the new Aetna business only accounted for roughly 7% of CVS Health's gross PBM wins for the 2017 selling season.
While Aetna's Coventry buyout helps CVS, the possibility that another acquisition by the large health insurer might be thwarted could also be good news. In July, the U.S. Department of Justice filed an antitrust lawsuit to stop Aetna's attempted takeover of Humana. When Aetna first announced its plans to buy Humana, there was speculation that this could result in the combined companies launching a PBM. If that happened, CVS could lose the Aetna business as early as 2019. That seems less likely now thanks to the federal government.
3. Acquisitions paying off
Aetna's acquisition activity might have mixed results for CVS Health, but the company's own acquisitions should all pay off in the long run. CVS closed its buyout of long-term care pharmacy Omnicare in August 2015. A few months later, the company finalized its acquisition of Target's pharmacies and clinics.
Integration of the Omnicare business is going as planned. CVS Health expects most of the integration to be wrapped up by the end of the year. One nice thing about the addition of Omnicare is that it has lower operating expenses than CVS' retail pharmacies.
The Target pharmacy integration completed ahead of schedule, with CVS Health's management calling it "one of our smoothest integrations ever." CVS picked up 1,667 pharmacies and 79 clinics operating in Target stores with the transaction.
Both of these deals are already positively impacting CVS Health's revenue and profits. I think both acquisitions position the company well for the future and I expect continued favorable year-over-year financial comparisons stemming from the Omnicare and Target transactions.
Long and short
I'm optimistic about CVS Health's prospects in the short run because of the factors above. However, there's always the possibility that CVS Health's stock could fall.
Over the long run, though, I'm more confident that CVS Health should be a winner. The company's PBM unit and its retail/long-term care segment both stand to benefit from an aging U.S. population. It's the long-term factors that I think make CVS Health stock more attractive for investors.