Key Takeaways:
Current Price: $65 Price Target: $90
Position Size: 1.87% 1-year Performance: -13%
- CEO transition announced for February 2021, current CEO Larry Merlo will be replaced by Aetna President Karen Lynch – we’re not expecting any dramatic change to the company’s strategy following the change
- 2020 guidance increased on the EPS and cash flow lines (higher on better working capital and underlying performance of the business)
- CEO Merlo quote: “we identified the strategic need to round out our suite of assets with a national health plan business which led to the industry disrupting acquisition of Aetna, and this month marks our two year anniversary as one company and we are now leveraging our local presence and communities to deliver expanded and integrated services to people, wherever they are“
- Winning quote from the Deutsche Bank analyst during the Q&A session: “congratulations to Larry and to Karen and I’ll say […] it’s always good to see a peaceful transition of power“
- 6 millions Covid tests administered so far (or 70% of retail setting tests)
- Flu vaccine administered August-October were up 78% y/y
Segments update:
- Health Care Benefits: membership growth driven by government products up 24% y/y (Medicare and Medicaid) while commercial membership declined 4%
- Pharmacy Services: revenue slightly down (-0.9%) due to some client losses and price compression, partially offset by Specialty Pharma growth. Operating income grew 12% due to purchasing economics and mix.
- PBM: 98% retention rate
- Retail/LTC: sales up ~6%, driven by increased prescription volume (+5.8%), higher front store sales (+2.2%), increased diagnostic testing. Profits were impacted by continued reimbursement pressure and additional COVID-19 costs
There are now 450 HealthHub across the US, in over 30 states. In 2021 CVS will expand the offering to add in-person behavioral health support. More visits are now to manage chronic services, which in addition to lowering ER visits and increase adherence to treatment will lower medical costs. Regarding its capital allocation, CVS continues to pay down debt, with the goal to achieve a low 3X leverage ratio.
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.
- Aetna acquisition makes it vertically integrated.
- 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