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CVS Health Corporation is an American retail pharmacy and healthcare company whose operations are divided into two segments, namely retail and long-term care and pharmacy services.
Its lines of business involve the distribution of pharmaceuticals at the retail level. It also provides medical supplies, health information technology, and care management products. To build this estimate, there is an array of potential outcomes for future free cash flows in the graph below. When examining the array of lines moving into the future, each one represents a certain probability of occurrence.
Assuming these potential outcomes, and that corresponding cash flows are accurately represented, CVS Health Corporation might be priced at a Whenever an investment is considered, one must compare it to any alternatives to weigh up the opportunity cost. At present, year treasuries are yielding 2. Assuming reversion to the mean occurs, the implied future return is currently 3. CVS Health Corporation, therefore, appears to offer a much better return for investors at present, but other individual stocks may be found which offer a similar return relative to the risk profile.
Investors must consider macro-economic factors that may impact economic and market performance as this could influence investment returns. Faced with the significant risk of potent new entrants in the sector, CVS is seeking to revamp its business model to combat the entrants.
Our assessment of CVS's strategy suggests a combination of operations aimed at following the broad industry trends. The company's efforts are directed at modernizing enterprise functions and the creation of transformational customer-centric services. Management indicates that the aim is to grow and differentiate the company.
Towards this end, CVS is using various front and back-end technologies, data, and analytics to drive higher prescription volumes. Technology improvements involve powerful healthcare decision-making engines driven by data and analytics. The change also includes the ability for customers to use mobile devices to refill prescriptions on smartphones and wearables such as Apple Watch.
CVS is also focusing a lot on e-commerce as part of their long-term strategy. Recently, the company developed an option to pick up a prescription in the CVS Digital innovation lab. The lab itself is aimed at the rapid fruition of new market ideas, which ensures alignment of company operations with the fast evolution of digital e-commerce.
Besides, to safeguard its market position and long-term growth, CVS is also tying its future to e-commerce and digital healthcare. We expect customer-centric solutions to result in the company raising its full-year revenue expectations. A key catalyst CVS has invested in since the downturn in is the revitalization of its business.
The aim is to differentiate itself and create a competitive advantage. In , CVS launched the HealthHUB concept, which are pharmacies that also provide personalized in-store healthcare services aimed at increasing customer traffic. We expect the expansion of health hubs to continue in as it provides a broader value proposition.
In a bid to improve the customer-centricity, CVS proposes a new retail engagement model to enhance convenience and accessibility.
It involves bundling online and physical healthcare services. We believe this will further increase the company's competitiveness. Furthermore, the company invests in MinuteClinics and health hubs to increase healthcare accessibility and affordability.
Figure 1 shows a peek into the innovative, new store-model targeted to deliver a differentiated consumer health experience.
The latest offering is aimed at the provision of healthcare services for chronic disease management and wellness programs in a simple, convenient, and affordable way.
CVS has already piloted over 50 health hubs in They plan to open by and by The business model is aimed at increasing the range of services and products offered by CVS to increase differentiation and the value proposition for consumers.
The retooling of its stores, we believe, will provide great one-stop shopping for healthcare services and products. In the longer term, a larger aging population will provide a favorable market of a population seeking healthcare services. Besides, healthcare spending is expected to grow at around 5.
An overall favorable regulatory environment includes the Patient Protection and Affordable Care Act, which will drive demand to attain insurance coverage where CVS is a player. Turning to our revenue projection in Table 3, the significant revenue growth in accounts for the full year annualized result, post-Aetna merger. In we expect revenue to outperform current guidance as the company continues to expand its HealthHUB concept.
We then expect revenue growth to retrace to single-digit growth but remain above the historical growth rates of the company. Our revenue growth projections are informed by historical data but adjusted for changes in the business model and the catalysts discussed, which we expect will revamp revenue opportunities.
As seen in the table, the company operates in an industry with meager operating margins, but the scale of its operations is massive. Source: HedgeMix Limited using Finbox.
The company has maintained a stable variable cost ratio , and the level of fixed costs remains relatively low, resulting in a more predictable projection of EBITDA as a share of the revenue. Furthermore, we believe that the structure of the industry may not significantly change in the projection horizon. Net Working Capital.
Table 4 accounts for a forward-looking adjustment in net-working capital to ensure that the increase in the current portion of long-term debt is captured in the calculation.
Depreciation and Capital Expenditures. The company maintains a very stable depreciation profile. The historical depreciation rate has not deviated significantly over the past ten years. We project that since the operations have not dramatically changed, adoption of the same profile over the period will adequately represent the company's depreciation and amortization.
Table 5: Depreciation and Amortization Forecast. Table 6 indicates the capital expenditures of CVS over the period. The forecast is guided mainly by history but with a margin of safety for potential new initiatives.
Table 6: Capital Expenditures Forecast. Chart 2: Historical Free Cashflow. Federal Tax Rate. Discount rate range: 6. However, we do believe that CVS Health will be able to capitalize on its HealthHUB concept, its ambitious e-commerce and digitalization work with the CVS Digital Innovation Lab at the forefront and that the company will continue to improve cost efficiency from mentioned synergies.
Finally, we believe the strategic initiatives are strengthening the economic moat of the company, which is vital for future growth. New competitive threats linger both from within and without the industry and strategic initiatives from competitors can pose significant risks to the company. Externally, the possible entry of new competitors such as Amazon AMZN may cause significant and sudden disruption to CVS earnings potential in the online sphere.
Amazon would pose a threat with its vast resources, its ease of integration from a logistical standpoint, its non-traditional business models and ease of assimilation. Hence, there is a risk of being overrun by potent competitors such as Amazon. Furthermore, the profitability of brick and mortar stores will continue to be challenged as competition tightens.
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|What is cvs health corporation oligopoly market structure||Another source of risk is regulatory pressure. Recommended For You. More info change also includes the ability for customers to use mobile devices to refill prescriptions on smartphones and wearables such as Apple Watch. We believe this will further increase the company's competitiveness. Valuation Assumptions Revenue Turning to our revenue projection in Source 3, the significant revenue growth in accounts for the full year annualized result, post-Aetna merger.|
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Contestable market theory was developed by William Baumol in to explain why in some monopoly or oligopolistic markets, firms may operate in a competitive manner which will enable consumers to obtain the benefits of economies of scale and lower prices as well as reducing the welfare losses associated with markets dominated by a few firms.
In the theory of contestable markets, If a company in a monopoly or oligopoly market believes that by fixing high prices and earning supernormal profits, it is possible to attract new companies to enter the industry, and these companies may occupy the market, then it may set the price at equal to or relatively close to the average cost level to prevent this from happening.
This strategy of setting the price below the price that can maximize corporate profits to prevent new companies from entering the market is called limit pricing. In order for this strategy to succeed, existing companies must accurately understand the cost structure of potential entrants. This will enable the existing companies to set the price below the lowest average cost of potential new entrants, which means that they will not be able to set a price that will make them profitable.
Obviously, the level of competition in a market will depend on how easy it is for new companies to enter the industry. Therefore, no entry barriers or low entry barriers are the key to determining this.
For any potential new entrants, the standardization of products and their access to the same technology as established companies are also very important. Thank you for your reading! For example, the cooperation between MinuteClinic and CVS Pharmacy leads to a wider service scope that improves competitive advantages by increasing convenience and cost savings that benefit client organizations and individual consumers. Still, the corporation can achieve higher growth by diversifying its operations along with such structural support.
This organizational structure allows considerable autonomy and corresponding organizational flexibility to ensure that each division or subsidiary achieves its business goals as it competes against other players in the healthcare and retail pharmacy markets.