Key Takeaways:
· COVID-19 is having a positive impact on CVS’s various businesses: greater use of 90-days prescriptions, more purchases made in front of store (in March), lower elective surgeries performed (April) benefitting Aetna’s costs
· Telemedicine and home delivery saw a sharp increase
· Liquidity is sufficient and the dividend is maintained
Current Price: $60 Price Target: $90
Position Size: 2.28% 1-year Performance: +9%
Yesterday CVS published its 1Q20 earnings results, with sales up ~8% and adjusted operating income up ~14%. Sales increased thanks to greater use of 90-days prescriptions (in response to COVID-19), early refill on maintenance medications and increased front store purchases (4x more than pre-COVID). This trend was especially strong in March while April saw weaker trends. Volume and cost savings initiatives boosted margins. While this was a great quarter, we do not believe this will be repeated throughout the year, as the boost in volume came from “pantry loading” of medication. Home delivery saw a sharp increase of +1000% in demand as well as it waived delivery fees for members (this was introduced to compete with Amazon). Telemedicine demand (through MinuteClinic virtual visits) jumped 600%. CVS is cutting capex by $200M. There does not seem to be any liquidity issues, with $10B of cash on hands, and ~$11B of CFO to be produced in 2020. The company also took on an additional $4B in debt in March to increase its financial flexibility. Any proceeds not used will be put towards debt reduction. Share repurchase was already put on hold until 2022, and dividends are maintained at the current level. Regarding unemployment risk to their Aetna business: so far, they do not have any concentration in industries/geographies hit the hardest by layoffs. Aetna is also benefitting from the -30% reduction in elective surgeries performed. On the PBM side, 70% of renewals are complete with a ~97% retention. In conclusion, we value CVS’ broad business model as it is executing on its vertical integration strategy.
2020 guidance was updated as follow:
GAAP EPS unchanged
CFO unchanged
Other items from the guidance were removed as COVID-19 impact is unknown
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
One Liberty Square
Suite 500
Boston, MA 02109