CVS Health (CVS 0.85%) might not strike you as your typical growth stock. The healthcare company operates pharmacy retail locations across the country and has a health insurance business in Aetna. From afar, it might look like just a boring healthcare stock that only dividend investors might want to buy.
But CVS isn't content with the status quo. Growth is always on its mind, and it is on the lookout to get bigger and more diversified. One of the moves it's eyeing right now could prove to be among its biggest: getting into primary care.
NYSE: CVS
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A deal could happen before year's end
On CVS' most-recent earnings call, management indicated that it is on the lookout for deals. President and CEO Karen Lynch said that the company wanted to extend its services, noting primary care as a key opportunity for the business and that "we are very encouraged and confident that we'll take the next step on this journey by the end of this year." At the same time, Lynch noted, "We can't be in the primary care without M&A."
The company certainly has the funds to make a deal happen. As of the end of June, CVS had cash and cash equivalents totaling more than $12 billion. Tech company Amazon recently announced plans to gained a footing in primary care with its relatively modest $3.9 billion purchase of primary care operator One Medical.
Rival Walgreens has big plans of its own
CVS and Walgreens (WBA +0.00%) have competing pharmacies, and soon they could have competing primary care clinics as well. Last year, Walgreens announced it was investing $5.2 billion in VillageMD to increase its stake in the primary care business to 63% (from 30%). Through the investment, Walgreens plans to have 1,000 primary care practices at its stores by 2027.
NASDAQ: WBA
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The key question is how will CVS' plans compare to Walgreens' and whether the two might end up in direct competition against one another. It seems inevitable that they will clash, as Walgreens is planning for its primary care practices to be in 30 U.S. markets by as early as 2025.
And given that CVS is looking go to the M&A route, it's likely not going to be content with a small or modest growth strategy. One of the benefits of an acquisition or partnership is that it can quickly accelerate a company's growth and position in a segment of the industry.
Would this move make CVS a better buy?
Adding primary care, and potentially making it available next to its stores like Walgreens plans to do, could give consumers more of a reason to shop at their local CVS. The company already offers virtual care, and its MinuteClinics provide customers with follow-up care for chronic conditions. Getting into primary care can be a natural extension of those services. And with an estimated 4.8 million people visiting CVS stores every day, the company already has a large customer base that it can tap into for this service.
Diversifying into primary care can build on CVS' existing business and lead to more growth down the road. The only concern would be whether it would shrink the company's already tight margins. In the trailing 12 months, CVS has reported a profit of $8.2 billion on revenue of nearly $308 billion, for a profit margin of only 2.7%. If its bottom line doesn't take much of a hit, this could end up being a net positive for CVS, as at the very least, getting into primary care should drive stronger sales numbers.
Is CVS a buy today?
Year to date, shares of CVS are up around 4%, which is impressive given that the S&P 500 has declined by 10%. The stock provides good value for investors, trading at a forward price-to-earnings multiple of 12; by comparison, the Health Care Select Sector SPDR Fund averages a multiple of over 16. Its dividend yield of 2.1% is also better than the S&P 500 average of 1.5%.
For long-term investors, CVS can be an excellent healthcare stock to hold onto given its stable position in the healthcare industry, strong resources, and its constant pursuit of growth.
