Running head: CVS HEALTH: COMPANY ANALYSIS
CVS Health: Company Analysis
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CVS HEALTH: COMPANY ANALYSIS
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Table of contents
CVS Health: Company Analysis ......................................................................................... 4
Analysis of scenario ............................................................................................................ 4
Analysis of the competitive industry .............................................................................. 4
Analysis of the interest rate............................................................................................. 5
Analysis of the overall economy..................................................................................... 6
Discussion of the role of market conditions have on the development of financial
models ......................................................................................................................................... 6
Procedures ........................................................................................................................... 7
Purpose of the developed model ..................................................................................... 7
Selected type of model .................................................................................................... 7
Explanation of the relevance of the equations to the conceptual model ......................... 8
Modeling techniques ........................................................................................................... 9
Inputs and assumptions used to build the model ............................................................ 9
Operational performance metrics .................................................................................. 10
Financial processes needed to engage in the construction of the model ....................... 12
Interpretation of the results ............................................................................................... 12
Analysis of the calculated results .................................................................................. 12
Presentation and discussion of the obtained results ...................................................... 14
Implementation ................................................................................................................. 15
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Recommended implementation strategy ....................................................................... 15
Involved organizational stakeholders ........................................................................... 15
Strategy for the balance of the risk and return .............................................................. 16
References ......................................................................................................................... 17
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CVS Health: Company Analysis
Analysis of scenario
Analysis of the competitive industry
The first step to develop a financial model with which to improve the performance of a
company like CVS Health is to understand the competitive forces operating in the health
industry. These competitive forces are critical, as they will determine whether or not the
implemented strategy is efficient enough to improve the financial results of the company. In this
sense, high competition between the healthcare companies will somehow constraint the growth
of any of them upon a certain limit, while a low competition should facilitate the growth of any
company wanting to achieve such goal.
According to the analysis of the industry carried out, there is a relatively high space for
improvement and growth, considering how the average profit margin of the companies is of
around 25% and how the revenues of the most relevant companies continue to increase year after
year (Plunkett et al., 2018). Nonetheless, it is crucial that companies like the CVS Health
Corporation keep a close look at their competitors to be able of reacting to any modification in
their strategy that could affect their market share. It is noteworthy how new companies may be
willing to enter the market attracted by the high growth potential regardless of the relatively high
investment required.
In this sense, CVS managers should evaluate how the different critical financial aspects
may influence the company's decision to maximize its wealth and increase its investments
(Fortune 500, 2017). The company should also ensure that the financial growth prospective
properly aligns with other crucial business management strategies. From this point of view, it is
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necessary to evaluate how the implemented plan may interact, and benefit, from the existing
corporate social responsibility of the company by promoting health in action, stakeholder
engagement, and leadership growth.
Lastly, the company managers need to ensure that the developed strategy permits the
continuance of the existing health action plan. Such an action plan focuses on promoting a
healthier lifestyle among the company's customers. At this point, the the continuous involvement
of the company in ensuring the health and wellbeing of its patients and affiliates has been one of
the keys to the extraordinary success of the CVS Health Corporation in the past years. Changing
such a strategy could thus have profound consequences for the company and its current leading
position in the healthcare industry.
One possible strategy to ensure the alignment of the proposed financial plan with the
existing health action plan is to focus the development of such policy on the control of
operational costs as an alternative to increasing the company's profit. Additionally, the company
should actively request the participation of the stakeholders, both as an internal and external
level, to ensure that the implemented plan aligns with their necessities. As such, stakeholders
play a crucial role when it comes to developing, executing and optimizing the different
management policies, as they are the ones having the highest knowledge of what the company
should do to improve its performance in their respective fields.
Analysis of the interest rate
One of the main drivers for the rapid expansion of the healthcare industry in the past
years has been the current low-interest rate, which enabled companies such as the CVS Health
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Corporation to effectively manage their current liabilities, hence achieving an adequate balance
between their equity and debt (CVS Health, 2018).
Analysis of the overall economy
The elderly represent one of the most relevant groups of patients of any healthcare
institution considering how they are at a higher risk of presenting multiple chronic diseases that
appear as people grow older than younger patients. From this point of view, the CVS Health
Corporation should focus its global economy practice on ensuring that it meets the needs of such
elderly patients to provide a high and stable portion of the market share. For this purpose, the
company offers this group of patients with enhanced prescription methods at a cost-efficient
price. This strategy has resulted in a high appreciation of the company by seniors, which value
the efforts done in maintaining a low cost on both prescription medicines and chronic treatments
(CVS Health, 2018).
Discussion of the role of market conditions have on the development of financial models
The developed economic model needs to account for the existing trends in the market
conditions. In this regard, the model should consider how CVS has been among the pioneers in
offering a segmented retail strategy, through which it addressed the needs of its multiple types of
customers. All in all, the CVS pharmacy segment strategy has mainly focused on the provision of
a vast range of pharmacy benefits and solutions to multiple segments, including healthcare
insurance companies, government employees, and various unions. Companies can also establish
some departmental sections, which offer different solutions to different customers interested in
the goods and services of the company (CVS Health, 2018). For this purpose, the CVS has 9709
CVS HEALTH: COMPANY ANALYSIS
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retail locations. It also offers its customers the possibility of purchasing the medical products in
the online retail pharmacy website.
Procedures
Purpose of the developed model
Some of the critical factors that contribute to the operation of healthcare companies such
as the CVS Health Corporation include the levels of client satisfaction, the existing competition
from other companies operating in the same or parallel industries, and the various operational
costs in which the company incurs when trying to provide its customers with outstanding health
care quality (Rivers & Glover, 2008). The model should also address the different implications of
analyzing each of these variables, and how such variables may impact the decision-making
process of the company. In this regard, it is essential that companies like the CVS Health
Corporation constantly monitor the quality of the healthcare service provided by analyzing, for
instance, the customer satisfaction level. They should also evaluate both the current operational
costs and the appearance of new alternatives in the market that would enable the company to
manage the costs more efficiently. In this sense, it is important to note how the excessive pricing
of the healthcare services provided would dramatically impact the volume of sales, as patients
would shift to competing companies if they perceive that the increased price does not align to a
higher quality.
Selected type of model
The model chosen is the discounted cash flow model, which provides satisfactory results
in dynamic industries such as the healthcare industry. This model has also proven to be
successful in the evaluation of the financial performance of companies that, like the CVS Health
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Corporation, see a continuous increase in their annual free cash flows year after year as the
company continues to grow.
Explanation of the relevance of the equations to the conceptual model
The basic equation of the discounted cash flow model used in the development of the
financial model for the CVS Health Corporation considers the contribution of two main terms,
the net debts of the company (dt) and the net amount paid to the company’s shareholders (F), as
seen below:
FCFt = dt + F
Once calculated the free cash flows for each year, the model calculates the value of the
company by applying the equation:
Where gcf represents the projected growth rate after T+1 years. Rho, on the other hand,
represents the equity rates while V0ND stands for the net debt of the organization (Penman, 2004).
The main advantage of using such a model is that it enables the calculation, not only of
the present situation but also of the past financial performance of the company. As such, it is
possible to extrapolate the obtained financial results to forecast what the financial performance
of the company will be like shortly. A study conducted and published in February 2018 revealed
that the CVS Company had estimated Discounted Cash Flow of 145 US dollars, making the
company to get ranked at an above average level (CVS Health, 2018).
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Modeling techniques
Inputs and assumptions used to build the model
The data of the model are the revenue, the gross margin, the cash flow, the net profit, the
debts, and the assets of the company in the past years. The assumptions of the model imply that
these variables will increase by 30-50% shortly, as shown in the following table:
Assumptions
4-year revenue growth rate 45%
Gross margin
50%
The perpetual growth rate
45%
Cash flows
45%
Net Profit
Net Profit Margin
30%
The debt to asset ratio
40%
The model used takes into account these inputs estimates the increase in the profit of the
company by evaluating how the revenue, gross margin, cash flow, net profit, debts, and assets
vary with time. In this regard, the model considers the following equations:
∆𝑃𝑟𝑜𝑓𝑖𝑡 = ∆𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠 − ∆𝐶𝑜𝑠𝑡𝑠
where both the variation in both the revenues and costs may get estimated through:
∆𝑦 =
Lastly, for the free cash flows:
𝑦𝑡 − 𝑦0
𝑡
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Operational performance metrics
The financial modeling under evaluation is the one of the CVS company. Various
parameters will get embraced in ascertaining the operational performance of the corporations.
One of the parameters that would get adopted in measuring operational performance is the gross
margin of the corporation. Gross margin is used to refer to the percentage of the total revenue of
the corporation over the distribution and production costs (Wagner & Batten, 2014). The gross
margin percentage derived by subtracting the total expenses incurred from the total revenues of
the corporation and dividing the obtained figure by the total amount of the taxes.
The revenue growth rate would also get embraced as an operational performance metric
for the CVS Corporation. Revenue growth rate is used to denote the level at which the revenues
of the corporation grow. When the revenues of a particular company are high, it gives an
implication that the costs incurred in the production and distribution processes are lower as
compared to the revenues obtained by the corporation. For the revenue growth rate of CVS
Corporation, its expected growth rate is of around 45 % every four years according to past
financial results. If the growth of revenue would increase significantly, then it will imply that the
corporation is at a position of executing its tasked responsibilities.
The patient outcomes and patient satisfaction are other parameters that will get embraced
in ascertaining the performance of the CVS company. Ideally, this is because patients prefer
receiving services from the companies that provide quality services or where they get assured of
obtaining quality outcomes (Wagner & Batten, 2014). Therefore, the level of satisfaction of the
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patients and the patient outcomes would be used to examine the extent to which the services
provided by the corporation give comfort to the customers. Even though the financial
performance indicators are the ones mainly embraced in evaluating the operational performance
of an organization, it is imperative to ascertain that operational performance in the healthcare
centers also entail the way in which services provided to the clients. Therefore, it is essential to
evaluate the level of patient satisfaction in CVS health corporation.
The selected financial, operational performance metrics chosen to evaluate the financial
situation of the CVS Health Corporation are its gross profit margin and the 4-year revenue
growth rate. The primary goal of using the gross margin is that of evaluating the financial
performance of the company by analyzing how the company manages to raise a revenue from the
operational costs incurred. In this regard, a positive gross margin indicates that the company is
profitable in the long run, as the prices are lower than the revenue obtained from its operation.
The total target margin was set at 24.2% considering that it is the average gross profit margin of
the most relevant competitors of the CVS Health Corporation (Plunkett et al., 2018).
On the other hand, the 4-year revenue growth rate evaluates how much the revenue has
increased concerning the previous four years. This growth rate has been set at 45% taking into
account the past performance of the company. Besides these financial, operational performance
metrics, and as was highlighted in previous essays, it is necessary that the managers of the CVS
Health Corporation use other critical performance metrics, such as the satisfaction degree of the
patients.
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Financial processes needed to engage in the construction of the model
The corporation would focus on enhancing its revenues while cutting down the costs
incurred I the provision of services to the patients. Capital efficiency and solvency are other
financial processes that would get embraced in carrying out the economic evaluation and
analysis of CVS company. Capital efficiency or solvency is used to refer to the potential of an
organization to carry out its operations with the existing or available funds. It is also used to
depict the possibility of the corporation to provide an opportunity for the investors to obtain
revenues from investing in the corporation. A close evaluation of CVS corporation describes that
the capital solvency of the corporation is high. Ideally, this is because, in the year 2014, the
company outlined a higher number of assets as compared to the liabilities. The number of assets
in the particular year was $70,550 (CVS Health Corporation,2017).
In the same year, the liabilities of the company amounted to $12,767. From the ratios
above, it is imperative to ascertain that the capital solvency of the company is high since it had
more assets as compared to the liabilities. Following the capital and financial projections of the
corporation, it is imperative to denote that the total assets of the company are expected to grow to
$47,000 in the year 2022 while the liabilities would decline to $ 5000. Still, the capital solvency
of the company will be high.
Interpretation of the results
Analysis of the calculated results
As observed in the following tables, the company has yet not met the target gross profit
margin of 24.2% but instead has presented a gross profit margin ranging from 15.4% to 18.8% in
the past years. These results indicate that the company is less performant than the industry
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average regarding the control of its operational costs, as the company presents the highest
revenue in the health industry (Plunket et al., 2018). On the other hand, the company has met the
target goal of a 45% increase in the revenue over the past four years.
CVS Health Corporation
Operational performance metric 1: Gross margin
Year
2012
2013
2014
2015
2016
2017
Total Revenue
$ 122,133,000,000 $ 126,761,000,000 $ 139,367,000,000 $ 153,290,000,000 $ 177,526,000,000 $ 184,765,000,000
Total Cost
$ 100,627,000,000 $ 102,978,000,000 $ 114,000,000,000 $ 126,762,000,000 $ 148,669,000,000 $ 156,220,000,000
Gross Margin
17.6%
18.8%
18.2%
17.3%
16.3%
15.4%
Target
24.2%
24.2%
24.2%
24.2%
24.2%
24.2%
Operational performance metric met?
No
No
No
No
No
No
Operational performance metric 2: 4-year revenue growth rate
Year
2012
2013
2014
2015
2016
2017
Total Revenue
$ 122,133,000,000 $ 126,761,000,000 $ 139,367,000,000 $ 153,290,000,000 $ 177,526,000,000 $ 184,765,000,000
Revenue growth rate
45.35%
45.76%
Target
45%
45%
Operational performance metric met?
Yes
Yes
Table 1. Summary of the past financial, operational performance
According to the results obtained from this analysis, it is necessary that the company
reevaluates its cost management strategies in an attempt to increase the gross margin above the
target industry average of 24.2%. Such action is critical, as it will enable the company to
maintain its current leading position in the market. In this regard, even if the company is
financially liable and has repeatedly remained in the prominent place of the health market, an
appropriate cost management strategy, and hence an increase of the company's gross margin will
enable the company to meet its needs and maintain its leading position in the market. Failing to
do so, in contrast, may end up in the company losing the leading position, as other big
competitors such as Walgreens Boot Alliance would outperform the company in the long run.
On the other hand, the computed financial, operational performance metrics play a
crucial role in the development of an economic model for the company. In this regard, the
calculated gross margin and revenue growth rate may be used in the forecasting of the future
financial results, as it would be possible to estimate the company's revenues and costs. These two
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elements represent the fundamental constituents of any economic model. It is thus possible to use
them in the calculation of the expected free cash flow and the debt of the company. From this
point of view, knowing the exact trend of the revenues and costs, the company can use financial
models such as the proposed discounted cash flow economic model, presented in milestone 2.
Presentation and discussion of the obtained results
In approaching my supervisor, I would highlight how the company has managed to
increase its revenue as expected, but that the high operational costs are somehow restraining the
company's growth to the point that the company has not yet met the target industry average gross
margin. I would then explain the importance of this result and how it affects the company's
competitive position in the long run, and to highlight the significance of developing a cost-cut
strategy to address this situation.
I would use a similar approach in addressing the issue with horizontal managers and
colleagues. Specifically, I would highlight how the company needs to improve its cost
management strategy to be able of reaching the gross target margin and hence remain
competitive in the long run.
Lastly, I would address a possible creditor by focusing on the constant increase in the
company's revenue, as such increase in the annual revenue demonstrates the company's ability to
earn income with which it will be able of repaying the obtained credit. I would consider different
modes of addressing each specific group of creditors or investors, such as publications of the
financial results in specialized journals, the trimester and annual reporting, the corporate finance
website, or announcements done in economic mass communication media.
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Implementation
Recommended implementation strategy
The recommended implementation strategy considers the results of the financial model
and the expected impact that such results will have on the decision-making process and the
healthcare industry. Most importantly, and as happens with any other change at a business level,
it is crucial to motivate and engage the different stakeholders for the implemented strategy to be
effective. For this purpose, the managers of the CVS Health Corporation should highlight how
the executed policy will result in a better performance of the company, and how the different
stakeholders will benefit from such better performance. For instance, it will be necessary to
highlight how the higher financial performance will enable the company to create new job
positions. The existing employees will as well benefit from the implemented strategy, as it will
be possible to improve the type of benefits offered to employees. Shareholders, on the other
hand, will benefit from the increase in the earnings per share and the implementation of an
attractive dividend policy. Lastly, customers may benefit from the implemented strategy
considering how the higher financial performance may result in lower costs of the healthcare
provider.
Involved organizational stakeholders
The organizational stakeholders involved in the implementation of this strategy include
both the managers of the company and the employees. It is crucial that all of them actively
participate in ensuring the correct and smooth implementation of a more efficient financial
performance policy.
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Strategy for the balance of the risk and return
Lastly, the higher financial performance of the company will directly result in a better
balancing of the existing risks and return. In this regard, the most critical risk would be that of
the failure of the implemented strategy if either the managers or the employees opposed to the
necessary changes by resisting them. The motivation during this change process is crucial to
mitigate such risk, achieved by highlighting how the implemented strategy will benefit all the
involved stakeholders. An additional risk is a temporary decrease in the performance as the
employees get used to the new policy. While this acclimation will require some time, it can
significantly decrease through the implementation of different training courses that will assist the
employees in the process of learning how to operate under the new policy. Overall, the
implemented strategy is expected to maximize the return of the company by both controlling the
operational costs and increasing the sales revenue as a result of the higher quality of the
healthcare services provided and a higher volume of sales by attracting more elderly patients.
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References
CVS Health (2018). Corporate Social Responsibility. http://investors.cvshealth.com/investorstory/growth-drivers
CVS Health (2018). Corporate Social Responsibility. Retrieved from:
https://cvshealth.com/social-responsibility/corporate-social-responsibility-csr
CVS Health (2018). Corporate Social Responsibility. Retrieved from:
http://investors.cvshealth.com/investor-story/our-business-model
CVS Health (CVS: NYS) Fundamental Valuation Report. (2018, February 16). Retrieved from
https://www.stockcalc.com/blog/Reports/2018/02/16/cvs-health-cvsnys-fundamentalvaluation-report/?doing_wp_cron=1533851554.7959220409393310546875
CVS Health Corporation. (2017). CVS Health Corporation SWOT Analysis, 1-8.
Fortune 500 (2017). CVS Health. Retrieved from: http://fortune.com/fortune500/cvs-health/
Penman, S. H. (2004). Valuation Models: An Issue of Accounting Theory (Unpublished master's
thesis).
Plunkett, J.W., Plunkett, M. B., Steinberg, J. S., Faulk, J., & Snider, I. J. (2018). CVS Health
Corporation. Search All. Retrieved August 24, 2018, from
http://www.plunkettresearchonline.com.
Rivers, P. A., & Glover, S. H. (2008). Healthcare competition, strategic mission, and patient
satisfaction: the research model and propositions. Journal of Health Organization and
Management, 22(6), 627-641. doi:10.1108/14777260810916597
CVS HEALTH: COMPANY ANALYSIS
Wagner, N. F., & Batten, J. (2014). Risk Management Post Financial Crisis: A Period of
Monetary Easing. Bingley: Emerald Group Publishing Limited.
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