We prefer CVS (CVS) as an investment over Walgreens (WBA) as we think the company is superior in many different aspects.

We won’t go into immense detail here but one of the reasons we like the company long-term is that CVS is becoming a one-stop-shop powerhouse health sector play. It now has well over 1,000 walk-in medical clinics offering check-ups, screenings and immunizations, among other services. CVS Health is also a leading pharmacy benefits manager and now has over 70 million members in its pharmacy benefit plan. With the possible addition of Aetna, which could substantially increase pharmacy volume, CVS looks very compelling once again as it seeks to implement this unprecedented vertical integration of a major insurer. We like the move and believe it is a significant step toward the future of health care. The deal could close as soon as December.

While Walgreens Boots Alliance is generating most of its revenue from pharmacy retail, CVS seems more diversified. Although the company reports in three different segments, only two of them are important to us. On the one hand we have the retail/LTC segment and on the other hand the pharmacy service segment (the corporate segment would be the third, but is not generating revenue).


As of December 31, 2016, the retail segment included 9,709 locations in 49 states (1,674 of these are pharmacies of the company within Target (NYSE: TGT) stores). During 2016 the retail/LTC segment filled approximately 1.2 billion prescriptions (counting 90-day prescriptions as three prescriptions) and the company held 23.8% of the United States retail pharmacy market. About 75% of the $81.1 billion in revenue were generated from prescription drugs, but a typical store also sells over-the-counter and personal care products as well as beauty and cosmetic products and additional products like greeting cards or photo finishing services.

The pharmacy service segment (CVS Caremark) provides a full range of pharmacy benefit manager (PBM) solutions and generated almost $120 billion in revenue in 2016. The clients are consisting primarily of employers, insurance companies, unions, health plans, etc. As of December 31, 2016, the pharmacy service segment operated 23 retail specialty pharmacy stores and 13 specialty mail order pharmacies. During 2016 the company filled or managed approximately 1.2 billion prescriptions (which equates to 1.6 billion prescriptions when counting 90-day prescriptions as three prescriptions).

We liked the stock under $75, and really like it under $70, even with the retail sales pressures. With a nice 3% yield, commitment to shareholders, and a growing health services business, we think the stock can be bought here comfortably. While there could be short-term pressures ahead, the possible integration of Aetna is bullish as its directly fits in with out thesis that CVS Health is becoming a one-stop shop for health.



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