Key Takeaways:
Current Price: $57 Price Target: $90
Position Size: 1.64% 1-year Performance: -17%
This morning CVS published its 2Q19 earnings results, with EPS above expectations (an 11% beat) thanks to higher revenue and gross margins. Revenue was up 3.7%: pharmacy same-store-sales were +4.7% (comparable scripts were up +7.2% thanks to better adherence to taking medication) and front end same-store-sales were +2.9% (although 80bps of that was a shift in Easter holiday date y/y). On the PBM side, claims were up 4% y/y, a growth in volume that helped boost margins 9.7% y/y. Net new business is still negative (-$7.6B, on the loss of Centene and lower new contracts) but this result was better than the previously negative $8.7B provided at the June investor day. Aetna is performing well, with synergies expectations now to be $400M in 2019 vs $300-350M previously announced: formulary optimization and transition of functions happening faster than initially thought (such as consolidation of the mail operations and pharmacy). The management team raised its FY19 guidance to $ $6.89-$7.00 from $6.75-$6.90. Its 2020 EPS is currently $7, which appears conservative at this point. We believe sentiment around this name will improve as regulatory concerns dissipate and we gain more clarity on PBM business wins during the year.
The new pilot Health Hub centers are showing promising results with increase customer traffic and additional sales, leading the company to add another 10 metro areas in the first half of 2020, leading to 1,500 locations by the end of 2021. CVS is also working on other new programs:
· launching a pilot program “hospital-to-home” in the Fall
· home hemodialysis has gained FDA approval to begin clinical trial (product launch targeted date of 2021)
· oncology solution launched in 14 states
Regarding the opioids situation, CVS is defending itself noting they only dispense scripts written by licensed physicians, and have not created demand. The company has made significant investments in technology and analytics to review the legitimacy of the medical intent.
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