Key Takeaways:
· “The environment surrounding COVID-19 is accelerating our transformation, giving us new opportunities to demonstrate the power of our integrated offerings and the ability to deliver care to consumers in the community, in the home and in the palm of their hand which has never been more important.” Said CEO Larry Merlo
· Results lifted by the Health Benefits segment (increased sales and profits) and PBM
· Retail segment weaker on lower volume and additional operating expenses
· EPS and cash flow guidance for the year increased
Current Price: $64 Price Target: $90
Position Size: 2.10% 1-year Performance: +19%
CVS printed mixed results this morning with outperformance coming from their Health Benefits segment (+6.1% revenue growth y/y as it grew its medical members), which saw increased profitability (+141% y/y) driven by lower utilization rate (COVID impact of delaying elective surgeries, care visits). The company saw a shift in customer mix: less commercial as corporations furloughed employees/shrank workforce, and more people on Medicaid.
The PBM segment also delivered better results with higher volume in scripts. It retention rate for the 2021 selling season remains high at 98%. But the retail segment suffered from pantry destocking and additional operational expenses. The July trend in Retail looks to decelerate from June (+4.6% from +7.1%), similar to pharmacy trends (+1.9% in July vs. +12.4% in June).
During the call, the management team emphasized a greater focus on the flu vaccine season this year, as symptoms are close to the COVID symptoms, and the role their pharmacies can play in distributing those vaccines. Getting vaccinated against the flu could limit the public confusion as the flu season starts this fall. The COVID-19 is most likely accelerating the development of its integrated model of care vision (including telehealth and monitoring at home). The company currently has more than 1,800 drive-thru testing sites, and has launched a B-to-B testing program for corporations and colleges (40 signed up so far, with over 1,000 prospects). Interestingly, 40% of tested people through their site was not a CVS customer previously, which CVS intend to convert as they connect digitally. Overall we would say that CVS is on track with its 2022 target of integrating Aetna and normalizing EPS.
As a results of this quarter’s performance, the company is raising its FY20 EPS guidance:
· EPS up to $7.14-$7.27 from $7.04-$7.17
· Cash flow $11B-$11.5B from $10.5B-$11B
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
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