CVS competes in three segments: health care benefits, pharmacy services, and retail/LTC. The health care benefits segment includes Aetna insurance. While the pharmacy services segment and retail/LTC segments include filling prescriptions and the MinuteClinic respectively.

Horizontal and Vertical Integration protects CVS from competitors. CVS customers are able to come into the Minute Clinic and immediately get the needed prescriptions from the pharmacy creating a convenient one-stop-shop. Aetna insurance provides customers with cost advantages.

CVS’s scale also provides another competitive advantage. Since CVS has a ~27% market share, they are able to better negotiate prices with drug producers. They also have a pharmacy within ten miles of 85% of the US population making replication highly capital intensive.

CVS is taking steps to protect itself from mail-order competition. They offer mail orders and ~40% of CVS pharmacy revenue comes from mail orders. In other industries, the omnichannel approach has proven to be superior.

Karen Lynch, CVS’s CEO, has reinvested into the MinuteClinic, increased the dividend, and authorized a large share buyback. The MinuteClinic is a smart investment because of its high

ROIC and horizontal integration. Also, $10bn or ~7.5% of the float is remaining from share repurchase.

While CVS does have all of these strong competitive advantages, I think Wall Streets’ assumptions make sense. I believe CVS is a fairly valued stock and is worth a buy on a pullback. Subscribe here to get the full CVS article in your email on Monday!