Key Takeaways:
· On track with its Aetna integration to become an integrated health-care solutions provider
· Integration synergies ahead of initial guidance for 2019 and 2020
· 2020 guidance is underwhelming but most likely conservative
Current Price: $73 Price Target: $90
Position Size: 2.35% 1-year Performance: +10%
This morning CVS published its 4Q19 earnings results, beating consensus estimates as every segments provided positive results. CVS is going through a multi-year integration process of its acquisition of Aetna. While CVS’s CEO said the integration was successful during the call, the prior Aetna CEO made some noise earlier this month by saying he was being pushed out of the board and that the integration was “far from over”. So far integration synergies are ahead of the initial plan, so we’ll take that as a sign that things are progressing in the right direction. It will most likely take another year before we see greater leverage on the top and bottom line of the integration and offering of better solutions to clients. CVS will be
Segment details:
· Pharmacy services: revenues up 6.2% thanks to higher claims volume although generics dispensing rate increased (lower prices)
· Retail/Long-term care: revenues +2.5% due to higher prescription volume but reimbursement and generic pressure
· Retail pharmacy: same-store-sales +3.2% with front store sales up 0.7% and pharmacy sales +4.1% (driven by continued adoption of patient care programs)
· Health care benefits: year-end membership was in line with expectations
Initial 2020 guidance:
· Sales up 2-3.5%
· EPS of $7.04-$7.17 (consensus $7.15), a 3-5% growth y/y, but we would not be surprised to see this number go up as the year progresses
· Integration synergies expected to be $800-$900M
· Enterprise modernization expected to drive a benefit of $450-$550M
· 600-650 HealthHub locations by the end of the year
· CFO of $10.5-$11B
· Leverage ratio to be in the low 3x in 2022
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
Category: earnings
tag: CVS
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
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Suite 500
Boston, MA 02109