Current Price: $70 Price Target: $90
Position Size: 2.41% 1-year Performance: -10%
Key Takeaways:
This morning CVS published its 3Q19 earnings results. Revenue was up 36% due to the addition of Aetna, but also thanks to positive performance in its legacy business: pharmacy same-store-sales were +4.5% and front end same-store-sales were +0.6%. On the PBM side, claims were up 9.3% y/y, but the ongoing price pressure impacted profitability. Net new business on the PBM side is improving vs. last quarter as well. The onboarding of IngenioRx (Anthem’s PBM) is progressing well. Regarding its HealthHub progress, 50 hubs will be opened by the end of this year. This store format should start having an impact on the company’s results in 2021, once it reached a more critical mass.
So far, the company has repaid $8B of net debt since the Aetna transaction closed, ahead of schedule. Its expected synergies went up from $300-350M to $400M in 2019, for a targeted $900M run rate in 2021. A reminder that in addition to the synergies with Aetna, CVS also expects $1.5-2B in run rate net savings in 2022 from its modernization efforts. It is great to see that thanks to its investments in corporate social responsibility, CVS has been listed in the Dow Jones Sustainability Index for 7 years in a row, and was just added to their World Index. The management team raised its FY19 earnings guidance once more (from $6.89-$7.0 to $6.97-$7.05) as performance has been good. We are glad to start seeing some clarity post-merger on where the combined business is heading, confirming our investment thesis.
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