Key Takeaways:
Current Price: $57 Price Target: $90
Position Size: 1.60% 1-year Performance: -20%
This morning CVS published its 1Q19 earnings results and gave an update on its 2019 outlook. Both surprised to the upside, in addition to a new cost cutting program named “Enterprise Modernization Initiative”. The new cost cutting plan will look for productivity improvements across the operations (mostly rationalization of IT) and is expected to generate $1.5-$2B in savings by 2022, on top of synergies with Aetna. CVS raised its FY19 EPS guidance range to $6.75 to $6.90 from $6.68 to $6.88. The company did not want to comment on the 2020 outlook only noting that FY20 PBM selling season was expected to have a mid-90%’s retention rate. Overall we are pleased to see some relief on this story, and maintain our positive view on the name long-term.
Segment details:
· Strong Retail/Long-Term-Care (LTC) adjusted prescription growth of 5.5%. Growth primarily driven by increased prescription volume and brand name drug price inflation. The retail pharmacy market share increased 140bps, now 26.2%.
· LTC program is on track to achieve margin improvements
· PBM guaranteed net cost pricing model continues to garner interest
· Aetna integration is tracking to the higher end of 2019 synergy goal of $300 to $350 million, so on track to exceed the initial target of $750 million in 2020. Membership growth of over 700,000 members vs. 12/31/2018; driven by strong Medicare Advantage and commercial ASC membership growth and initiation of new Medicaid contracts in Kansas and Florida
· The company said a handful of new “HealthHub” pharmacies launched in Houston this year have drawn more customers than expected. It plans to launch more such stores in Houston and plans to provide details of a national roll-out at the Analyst Day in June
Since the close of the Aetna transaction, they have repaid ~ $4 billion of debt.
Thesis on CVS
- Market leader: largest pharmacy benefit manager (PBM) in the US. This gives CVS scale advantage and negotiating power with pharma companies to obtain better drug pricing discounts. Also the largest US pharmacy retailer, giving it more touch points with consumers/patients. Finally, market share leader in long-term care pharmacy sector thanks to its Omnicare acquisition.
- Stable and predictable top line and margin profile. CVS benefits from an ageing population in increasing needs of prescription drugs.
- shareholder friendly, offering a 7% shareholder yield (5% share repurchase + 2.6% dividend yield)
$CVS.US
[tag CVS]
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109