CVS Health (CVS -0.17%) delivered some really good news to investors last week with better-than-expected second-quarter results. The giant healthcare company beat Wall Street analysts' revenue and earnings estimates. CVS Health also raised its full-year 2019 guidance for the second quarter in a row.
One quarter doesn't make or break a stock. But it seems pretty clear now that CVS Health is the best pharmacy stock on the market. Here are three rock-solid reasons why.
Image source: CVS Health.
1. It's out-innovating rivals
CVS Health continues to beat its rivals in what I view as the most critical area that will drive long-term growth: innovation. The company's executives talked quite a bit in the Q2 conference call about one example of CVS Health's innovation prowess, the HealthHUB concept.
HealthHUB stores offer a wide range of healthcare services and technology solutions such as health kiosks. Over one-fifth of these stores are dedicated to health services, including durable medical equipment and products for sleep apnea and diabetes care. The stores feature a "care concierge" to help customers find the products and services they need.
Earlier this year, CVS Health piloted a handful of HealthHUB locations. The company plans to convert 1,500 stores to the HealthHUB concept by the end of 2021. CVS Health CEO Larry Merlo said that the company's initial HealthHUB locations are experiencing increased customer traffic as well as higher front-store sales and MinuteClinic visits.
Another promising innovation from CVS Health is its home hemodialysis system. The company received FDA approval in July to begin a clinical trial of this system. Merlo said CVS Health hopes to launch its home dialysis system in 2021.
2. Aetna is a huge plus
Some expressed skepticism when CVS Health first announced its intention to acquire Aetna. So far, though, the addition of the large health insurer to CVS Health's lineup appears to be a huge plus.
Aetna's business is booming thanks primarily to growth in its Medicare Advantage plans. This helped boost CVS Health's top-line performance in Q2. The company is also on track to realize $400 million in synergies this year, higher than its previous estimate of between $300 million and $350 million. CVS Health projects synergies of $800 million in 2020 and $900 million in 2021.
There are also other ways that the integration of Aetna into its business should benefit CVS Health. Merlo noted that the company recently launched a pilot program of its NovoLogix technology platform that targets increasing medication adherence with Aetna members and providers in 14 states. He said that CVS Health plans to expand this pilot to more Aetna members and providers later in 2019. Increased medication adherence drives prescription volumes for the company's pharmacy business. Also, Aetna could offer its members no or low co-pays at MinuteClinics, steering more customers to CVS pharmacies.
Merlo said that CVS Health is "building natural hedges" in its business model. For example, a really nasty flu season would be a headwind for Aetna but would increase sales for its retail pharmacy and pharmacy benefits management (PBM) businesses. On the other hand, lower pharmacy spending would have the opposite impact.
3. It's expanding while other rivals are shrinking
Rite Aid is much smaller than it once was. CVS Health's biggest rival, Walgreens Boots Alliance, recently announced that it plans to close around 200 stores across the U.S. But while these competitors are shrinking, CVS continues to expand -- albeit at a slower pace than in the past.
Kevin Hourican, who heads up the CVS pharmacy business, said that the company will open 100 new stores this year compared to around 300 new stores annually a few years ago. He also projected that the number of new store openings could decline to 50 in 2020. A slower rate of expansion is better than a contraction, though, especially if CVS Health can keep delivering solid earnings growth.
Still some risks
CVS Health doesn't have a walk in the park to achieve success in the future. The retail pharmacy business remains intensely competitive. Its PBM business could come under fire down the road after winning a reprieve by the Trump administration's decision to withdraw attempts to change rebate rules. If a single-payer healthcare system is implemented as some presidential candidates are proposing, it would hit CVS Health really hard.
These risks could increase volatility for CVS Health's share price. However, they don't override the fact that CVS Health has established a solid position as the front-runner among pharmacy stocks.
