CVS Health Corporation (CVS Quick QuoteCVS - Free Report) is well-poised for growth, backed by the strength of the pharmacy service business within the health service segment. The integration of Signify Health and Oak Street Health into CVS Health assets such as Aetna, MinuteClinic and CVS Pharmacy will unlock more opportunities for the company and drive patient engagement and growth. A strong solvent balance sheet appears highly promising.

However, the company increasingly faces competition in each of the geographies in which it operates. Its international operations are occasionally subject to more stringent, legal and regulatory requirements, which may hinder CVS Health’s performance.

In the past year, this Zacks Rank #3 (Hold) stock has declined 26.6% compared with the industry’s 29.1% fall and the S&P 500’s 19.5% rise.

The pharmacy innovation company, with integrated offerings across the entire spectrum of pharmacy care, has a market capitalization of $89.63 billion. The company has a long-term estimated earnings growth rate of 6.1% compared with the industry’s 5.6%. It surpassed estimates in all the trailing four quarters, the average surprise being 4.8%.

Let’s delve deeper.

Tailwinds

Pharmacy Business on Growth Track: Over the last few quarters, the business registered revenue growth after several quarters of a drag. The company’s considerable expansion in retail pharmacy has led to significant market share increases over time. In the front store, CVS Health has grown its market share, increased household penetration and delivered historically high service levels. This positions the company well to manage through economic volatility.

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During the fiscal second quarter, same-store sales, excluding OTC test kits, grew by more than 1%, demonstrating the resiliency of front-store offerings in a more challenging consumer environment. The company exceeded 53 million unique digital customers, recording a 24% increase in digital sales versus the prior year. 

Health Service Business Gains Traction: Within Health Service, both Signify Health and Oak Street Health continue to deliver strong business performance consistent with expectations. These assets bring core capabilities to the multi-payor value-based care platform that drives optimal patient engagement with health services across multiple channels.

Signify has shown great customer retention for its health plan and health system clients since the acquisition. More Medicare users can now access Signify's goods due to CVS Health's new partnerships. Through the acquisition of Oak Street Health, CVS Health is speeding up patient growth due to its extensive neighborhood presence and capacity to connect customers through a variety of channels.  

Strong Solvency and High Return for Investors: At the end of the second quarter of 2023, CVS Health recorded cash and cash equivalents of $16.89 billion, sufficiently solvent to pay its near-term payable debt of $2.4 million. Long-term debt came up to $61.42 billion compared with $56.45 billion at the end of the first quarter of 2023. CVS Health’s capital deployment policy is based on the return of shareholders’ money through dividends and share buybacks. The company’s current payout ratio stands at 27.2%.

Downsides

Exposure to International Market Risks: CVS Health’s international operations present political, legal, compliance, operational, regulatory, economic and other risks. These risks vary widely by country and include varying regional and geopolitical business conditions and demands, government intervention and censorship, discriminatory regulation, climate change regulation, nationalization or expropriation of assets and pricing constraints. Fluctuations in foreign currency exchange rates may adversely affect its revenues, operating results and cash flows from its international operations.

Competitive Landscape: Despite significant new client wins during a strong selling season, intense competition and tough industry conditions act as major impediments for CVS Health. Major competitors, such as Walgreens, Target and Wal-Mart, are expanding their pharmacy businesses. Competition is especially tough in the pharmacy segment as other retail businesses continue to add pharmacy departments, and low-cost pharmacy options become available. Discount retailers, in particular, have made substantial contributions to gaining market share.

Estimate Trends

In the past 30 days, the Zacks Consensus Estimate for its fiscal 2023 earnings has moved down 0.23% to $8.60 per share.

The Zacks Consensus Estimate for fiscal 2023 revenues is pegged at $352.5 billion, suggesting a 9.3% rise from the year-ago reported number.

Key Picks

Some better-ranked stocks in the broader medical space are Haemonetics (HAE Quick QuoteHAE - Free Report) , Intuitive Surgical (ISRG Quick QuoteISRG - Free Report) and Quanterix (QTRX Quick QuoteQTRX - Free Report) .

Haemonetics has an estimated earnings growth rate of 26.1% in fiscal 2024 compared with the industry’s 18.7%. HAE’s earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 19.39%. Its shares have rallied 23.1% against the industry’s 0.5% fall in the past year.

HAE carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Intuitive Surgical, carrying a Zacks Rank #2 at present, has a long-term estimated earnings growth rate of 15.7% compared with the industry’s 15.5%. Shares of the company have rallied 58.1% compared with the industry’s 3.6% growth over the past year.

ISRG’s earnings surpassed estimates in three of the trailing four quarters and missed in one, the average surprise being 4.19%.

Quanterix, carrying a Zacks Rank #2 at present, has an estimated earnings growth rate of 62.8% for the current year compared with the industry’s 15.2%. Shares of QTRX have surged 153.6% against the industry’s 0.6% decline over the past year.