Morningstar

CVS Guides Cautiously for 2021 After Strong 2020

The narrow-moat company beat our expectations, and we are keeping our fair value estimate at $92 per share.

Securities In This Article
CVS Health Corp
(CVS)

Narrow-moat CVS Health CVS turned in fourth-quarter and 2020 results that beat our expectations, especially on the cash flow front, but its outlook for 2021 appears cautious. After incorporating the cash flow outperformance in 2020 into our model, we are keeping our fair value estimate at $92 per share after mildly trimming our 2021 estimates. The shares remain undervalued, in our opinion, and the market may continue to discount them until CVS materially accelerates its earnings growth on a sustainable basis. For the quarter and full year, CVS beat our expectations substantially. In the quarter, CVS revenue reached $69.6 billion (4% growth), above FactSet consensus of $68.8 billion, and adjusted EPS hit $1.30, above consensus of $1.23. CVS also turned in much higher cash flows than previously anticipated, with 2020 operating cash flow of $15.9 billion, well above its most recently raised guidance of $12.75 billion-$13.25 billion. With this outperformance in the fourth quarter, we were surprised that management's guidance for 2021 was so cautious. In 2021, the company expects $7.39-$7.55 of adjusted EPS (4%-6% above its 2020 baseline of $7.10, which management continues to view as its jumping-off point after adjusting for COVID-19-related benefits and a recent divestiture), or slightly below our previous estimate of $7.58. Its operating cash flow range of $12.0 billion-$12.5 billion was also slightly below our previous expectation of $12.6 billion for 2021. Overall, management expects the ongoing pandemic to have a neutral effect on the company in 2021 with benefits in the retail/long-term care segment offset by challenges in the health insurance operations related primarily to higher than previously expected Medicare-related payments, which most other insurers have highlighted as a headwind for 2021. Positively, management also said its long-term goal of returning to low-double-digit adjusted EPS growth by 2022 remains the company's target.

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About the Author

Julie Utterback, CFA

Senior Equity Analyst
More from Author

Julie Utterback, CFA, is a senior equity analyst, AM Healthcare, for Morningstar*. She focuses on medical technology and service companies. She covers managed care organizations including UnitedHealth, service providers like HCA, medical suppliers such as Baxter, and life sciences companies like Danaher. She is also the chairperson of the equity research team’s capital allocation methodology.

Before joining Morningstar in 2005, Utterback was an equity analyst at State Farm Insurance for several years. Utterback joined Morningstar in 2005 as an equity analyst in the healthcare industry, and initially she primarily covered medical technology companies, including orthopedic device, medical equipment, and cardiac device firms. In 2010, she joined Morningstar's credit research team, initiating coverage of the entire healthcare industry and generally helping the organization expand and maintain its credit coverage across many industries. She held that senior credit analyst role until April 2019, when she returned to the equity team to cover medical technology and service companies.

Utterback holds a bachelor's degree in finance from the University of Illinois Urbana-Champaign’s Gies College of Business. She also holds the Chartered Financial Analyst® designation.

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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