Key Takeaways:
Current Price: $82 Price Target: $90
Position Size: 2.04% 1-year Performance: +29%
CVS reported 2Q21 earnings this morning that beat consensus expectations thanks to strong revenue growth of 11.1% as care return to normal levels and vaccines boosted sales. An employee wage hike to $15/hr minimum by the end of July 2022 will increase costs (current rate is $11/hr). The CEO thinks this is necessary to retain employee in a tight retail labor market (see quote below). On the Health Care Benefits side, covid-related care costs were a bit higher than expected, and a return to normal level of care (ex-covid) pushed expenses higher, raising the Medical benefit ratio higher to 84.1% from 70.3% in 2Q 2020. CVS will host its Analyst Day in December, and the event could be a catalyst for the stock, as the new management team will provide some clarity around earnings growth for 2022 and capital spending strategy. The company remains cautious as the pandemic is not yet over and cases climb again, so its 2021 guidance raise was not sufficient to lift the stock higher. Another rise in costs to treat covid patients and/or deferral of doctor’s visits (and subsequent drug purchase) could be detrimental to CVS revenue growth.
Segments update:
- Health Care Benefits: +11% revenue growth
· Medical Benefit Ratio of 84.1% as the company returns to normalized utilization rate vs historically low in 2Q2020 due to covid – non-covid related utilization emerged favorably, while covid-related expenses were higher than expected
- Pharmacy Services: +9.8% revenue growth thanks to higher volume, driven by Specialty Pharmacy growth of 8.9% due to new business wins & brand inflation
- Retail/LTC: +14.2% revenue growth. Same-store-sales +12.3%. Pharmacy SSS grew 12.4% and front store sales +12%
- Covid update: 29M tests administered, 30M vaccines administered total. 40% of vaccines administered in the last 2 months were to members of under-represented communities
FY 2021 guidance:
· Revenue growth raised to 4.5%-6.25% from 4%-5.75% – due to all segments expecting better performance
· Cost savings $900M to $1.1B reiterated
· Adjusted EPS raised to $7.70-$7.80 from $7.56-$7.68
· CFO raised $0.5B to $12.5-$13B
CEO quotes:
- “I would highlight a couple things in front of us. One is that, as you know, we have more opportunities and expanding our digital access and digital connections. We’ve seen across the board with our next best actions, using digital connections. We’ve seen — for those individuals, we’ve seen reductions in overall medical costs. We also have the opportunity to expand our home service and delivery.”
- “we are seeing 65% of our employees that are hourly are already at or above $15 an hour. So this is a very targeted investment for our pharmacy technicians, our front store colleagues. And we will start a series of wage increases beginning in September, which is really what’s driving that $125 million impact to the latter half of the year. Obviously, it’s a tight labor market. We are paying attention. We’ve got a lot of hiring to do to support growth. And so far, we see pressure, but we’ve been managing through it. But we’re watching that labor market. We’re seeing impacts in the stores. And that’s part of why we’re making this wage investment today”
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