Morningstar

CVS Turns in Strong Fourth Quarter

We expect to maintain our fair value estimate, and we still view shares as undervalued.

Securities In This Article
CVS Health Corp
(CVS)

Narrow-moat CVS Health CVS turned in fourth-quarter operating results that slightly beat our expectations on the bottom line. With the company remaining on track to roughly meet expectations during its post-Aetna investment years, we expect to maintain our fair value estimate after these results, and we still view shares as undervalued. After acquiring Aetna in late 2018, we expect significant synergies and potential share repurchases (in future periods) to boost adjusted EPS growth toward the double-digits in 2022 and beyond.

In the quarter, revenue reached $66.9 billion, above Capital IQ consensus of $64.0 billion, and adjusted earnings per share hit $1.73, above consensus of $1.69. By segment, the PBM business delivered strong 10% growth in claims processed to 534 million in the quarter, but adjusted operating income grew only 2% to $1.4 billion due to ongoing pricing pressure. The retail/long-term care segment grew 3% year over year to $22.6 billion in sales, but adjusted operating income declined 4% to $2.0 billion in the quarter because of ongoing reimbursement pressure. Operationally, the retail stores remained strong with 3% same-store sales growth, a 7% increase in prescription volume, an 80-basis-point increase in U.S. prescription share to 26.8%, and 1% front of store growth. Legacy Aetna performed well, too, generating nearly 4% growth in medical membership to 22.9 million on particular strength in government plans, including the fast-growing Medicare Advantage market where Aetna grew over 30%.

For 2020, management highlighted guidance that looks roughly in line with our expectations after considering a dilution headwind. Specifically, the firm now expects EPS of $7.04-$7.17. Management noted that 2020 EPS would be negatively affected by about $0.08 of share-based compensation dilution because it is not repurchasing shares until it deleverages to its low-3s goal around 2022.

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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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