Key Takeaways:
Current Price: $81 Price Target: $90
Position Size: 2.01% 1-year Performance: +30%
CVS reported 1Q21 earnings this morning that beat consensus expectations thanks to better Health Care Benefits and PBM segments performance. Revenue grew 3.5%, similar to Q4, and adjusted operating margin dropped 240bps in Retail/LTC (lower traffic) while Healthcare Benefits operating margin expanded 70bps (better cost management). Guidance was raised on the top and bottom line, but the management team remained conservative in their raise, as they see areas of uncertainties still such as vaccine costs, vaccine hesitancy allowing a return to business as usual. Urban areas are also slower to return to normal than expected. On the positive side, CVS has won some large PBM contracts from Rx Alliance (Walgreens/Prime). CVS has a relationship with Teladoc for its virtual offering, a key competitive offering. This opportunity to shift members to site of care with lower costs should be a positive over time for costs and membership retention. The combination of in person community sites (Health Hub and MinuteClinic) and telehealth will be a great competitive advantage over time. On the capital allocation front, CVS paid down $3B in debt in the quarter. Net debt/EBITDA is on track to achieve 3X target in 2022. We continue to think CVS’s approach to healthcare as a diversified company provides opportunities to interacts with its customers in various parts of the system and gain market shares. This is a multi-year process though and patience is key to see meaningful results.
Segments update:
· Health Care Benefits: +6.7% revenue growth, thanks to increased membership in government products
· Total medical members flat y/y
· Medical Benefit Ratio of 83.2%
· Pharmacy Services: +3.2% revenue growth, driven by Specialty Pharmacy growth of 7.2% (new business wins and inflation)
· Retail/LTC: +2.3% revenue growth. Same-store-sales +0.4% impacted by tough y/y comps (pantry loading last year). Pharmacy SSS grew 4.1% due to market share gains, vaccinations, while a weak cold/cough season was a negative
· 250 additional Health Hubs added (total 800) – 1,000 targeted by the end of the year
· 90% second dose of Covid-19 vaccine compliance at CVS Health locations, and 1/3 of vaccination patients in retail pharmacies from under-represented populations
FY 2021 guidance:
· Revenue growth raised to 4%-5.75% from 3%-4.5% – due to good momentum YTD. Possibility of a booster for Covid vaccine not in the company’s outlook for 2021.
· Cost savings $900M to $1.1B reiterated
· Adjusted EPS raised to $7.56-$7.68 from $7.39-$7.55
· Unchanged capex guidance $2.7B-$3B – higher than prior years as the company plans to invest more in technology and digital enhancements
· CFO $12B-$12.5B – unchanged guidance
· Continued Covid testing, but covid impact should be immaterial to EPS
· Flat dividend and no buyback
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
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109