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Here's Why CVS Health (CVS) Should Be in Your Portfolio

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CVS Health Corporation (CVS - Free Report) has been gaining investor confidence, courtesy of the Aetna deal.

In the past three months, shares of the company have rallied 3.4% versus the industry’s 0.7% rise.

Banking on a few solid factors, this Zacks Rank #3 (Hold) stock is worth holding on to for the moment.

What’s Favoring the Stock?

Impressive Aetna Synergies: CVS Health's purchase of the U.S. health insurance giant Aetna for a colossal $70 billion marks a momentous healthcare consolidation. According to CVS Health, this integration will benefit all Aetna and Caremark clients and their respective members.

PBM Business Gaining Traction: With regard to its 2020 PBM selling season, CVS Health has noted that the retention rate currently stands in the mid-90%, excluding the impact of the Centene acquisition. Adjusted claims increased 2.8% over the year-ago quarter, driven by net new business wins and continued adoption of maintenance choice.

Specialty Pharmacy – a High-Growth Avenue: The company noted that despite a slowdown in revenue growth compared to the previous years on lower levels of inflation on specialty drugs and increase in generic dispensing, the company posted strong overall performance. The year-over-year growth was driven largely by increases in the pharmacy network claims, brand inflation, and growth in specialty pharmacy.

Downsides

There are a few factors that have been marring the stock’s growth prospects.

Risks Related to Reduced Reimbursement: A significant portion of CVS Health’s net revenues is derived from Medicare, Medicaid and other government-sponsored health care programs. The company is therefore subject to federal and state reimbursement laws and regulatory requirements, anti-remuneration laws, the Stark Law and/or federal and state false claims laws.

Competitive Landscape: Competition is especially tough in the pharmacy segment as other retail businesses continue to add pharmacy departments and low-cost pharmacy options. Major firms such as Walgreens, Target and Wal-Mart, expanding their pharmacy businesses, also pose competitive threat to CVS Health.

Which Way Are Estimates Moving?

For the second quarter of 2019, the Zacks Consensus Estimate for earnings is pegged at $1.69, indicating no growth from the year-ago quarter’s reported figure. The consensus mark for revenues stands at $62.63 billion, implying a 34.1% improvement from the year-earlier quarter.

For 2019, the Zacks Consensus Estimate for earnings is pinned at $6.86, suggesting a 3.1% fall from the prior-year period’s reported number. The same for revenues is pegged at $252.56 billion, indicating 30.1% rise from the comparable quarter last year.

Key Picks

A few better-ranked stocks in the broader medical space are Teleflex Inc. (TFX - Free Report) , Penumbra (PEN - Free Report) and Bruker Corporation (BRKR - Free Report) , each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Teleflex’s long-term earnings growth rate is expected to be 13.7%.

Penumbra’s long-term earnings growth rate is projected at 21.5%.

Bruker’s long-term earnings growth rate is estimated at 12.6%.

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