Key Takeaways:
Current Price: $72 Price Target: $90
Position Size: 2.04% 1-year Performance: +4%
CVS reported earnings this morning. Revenue grew 3.5% in Q4, and adjusted operating margin dropped 160bps due to Covid costs and decreased traffic in stores. Today, CVS is the largest community testing organization in the US for covid-19. Overall 4Q performance was as expected, although FY21 underwhelmed a bit on the EPS (no lift in guidance from prior commentaries) and cash-flow, with timing of some items pulled into 2020 numbers from 2021, while capex is expected to increase above historical levels. In 2020, full-year cash flow grew 23%, thanks to good performance, working capital improvements and timing of some cash transactions. Net debt/EBITDA is now at 4X, on track to achieve 3X target in 2022. We think CVS 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: +9.6%, thanks to increased membership in government products. The segment’ s profits were impacted by the higher cost of COVID testing and treatment
- Total medical members increased 2.2% y/y
- Medical Benefit Ratio of 86.7% is higher y/y (meaning more of the premiums collected was used to pay for medical expenses – and less left for profits)
· Pharmacy Services: -1.9% due to some client losses and continued price compression
· PBM: 98% retention rate
· Retail/LTC: +6.6% due to increased prescriptions, flu vaccines, Covid testing (worth $400M in Q4). Same-store-sales +5.3%, growth in prescriptions driven by increased adoption of patient care programs
FY 2021 guidance:
- Q1 expected to be the lowest earnings of the year, affected by investments to advance vaccination program, and lower front store traffic due to weak flu season
- Revenue growth between 3%-4.5% – strong growth in Medicare products, specialty pharmacy, brand drug inflation
- Return to normalized medical costs and physicians visits through the year
- Cost savings $900M to $1.1B
- Adjusted EPS $7.39-$7.55 – +4% to +6% (consensus $7.50)
- Capex $2.7B-$3B – higher than prior years as the company plans to invest more in technology and digital enhancements
- CFO $12B-$12.5B
- 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