Morningstar

CVS Maintains 2020 Bottom-Line Outlook Despite COVID-19

We view shares of this narrow-moat firm as significantly undervalued.

Securities In This Article
CVS Health Corp
(CVS)

Narrow-moat CVS Health CVS turned in first-quarter operating results that significantly beat expectations, due to a surge of activity in its stores and PBM related to shelter-in-place orders that began in mid-March. Joining the other four managed care organizations that we cover, CVS management has maintained its 2020 EPS guidance, suggesting the pullback in its retail stores, in particular, following initial stocking activities in March should not trip up the rest of 2020. We are maintaining our fair value estimate for CVS and still view shares as significantly undervalued.

In the quarter, revenue reached $66.8 billion (8% growth), above Capital IQ consensus of $64.1 billion, and adjusted earnings per share hit $1.91 (18% growth), above consensus of $1.63. Management estimates that COVID-19 positively influenced its adjusted EPS by $0.10 in the quarter. By segment, the PBM business delivered 12% growth in claims processed to 541 million in the quarter, including about 125 basis points of benefit from COVID-19, and adjusted operating income grew 25% to $1.2 billion. The retail/long-term care segment grew 8% year over year to $22.7 billion in sales, and adjusted operating income grew 27% to $1.9 billion in the quarter, which included a surge related to COVID-19 on prescription volume (up 200 basis points on COVID-19) and front of store sales (up 650 basis points on COVID-19). In health insurance, CVS grew medical membership 2% sequentially to 23.5 million on strength in government plans.

With these strong first-quarter results, management was able to maintain its bottom-line guidance for 2020, despite a pullback in momentum in April after initial stocking activities in March. For example, front of store sales were down 11% year over year in April, after being up 19% in March. On the bottom line though, the firm still expects EPS of $7.04-$7.17 and operating cash flow of $10.5 billion-$11.0 billion in 2020, and our estimates remain roughly in line with that outlook.

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About the Author

Julie Utterback, CFA

Senior Equity Analyst
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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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