Morningstar

Favorable Tax Developments Boost CVS Outlook

We continue to view shares as undervalued for the narrow-moat company.

Securities In This Article
CVS Health Corp
(CVS)

Narrow-moat CVS Health CVS turned in second-quarter operating results that beat expectations and allowed the firm to boost its 2020 outlook. After making similar changes to our expectations for 2020, our fair value estimate did not change materially. We continue to view shares as undervalued, though, recently trading at just 9 times 2020 expected earnings and offering a 3% dividend yield.

CVS' second-quarter results beat expectations primarily because of lower utilization of medical services, which provided a cost benefit to the insurance operations it acquired from Aetna in 2018. In the quarter, revenue reached $65.3 billion (3% growth), above Capital IQ consensus of $64.3 billion, and adjusted earnings per share hit $2.64 (40% growth), above consensus of $1.92. Management estimates that COVID-19 positively influenced its adjusted EPS by $0.70-$0.80 in the quarter. Also, a favorable tax resolution with state and local governments added about $0.10 to the company's bottom-line in the quarter, which was the primary reason CVS increased its guidance for the full year.

For 2020, management raised its outlook for EPS and operating cash flow slightly on the quarter's results, as it expects some offsets later in the year to recent COVID-19 benefits. For 2020, CVS now expects adjusted EPS of $7.14-7.27, up from $7.04-$7.17 previously, and operating cash flow of $11.0 billion to $11.5 billion, up from $10.5 billion-$11.0 billion previously. We have raised our outlook for 2020 in line with that new guidance. However, we have not changed our assumptions beyond that and noted that management still appears to be working toward goals laid out in previous investor events. Specifically, the company expects modest EPS growth in the next couple of years and is only working toward double-digit earnings growth by 2022. That is a standard that its insurance peers are achieving now, and we suspect CVS' shares may remain constrained until it can materially accelerate profit growth.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

More in Stocks

Consumer Defensives: Despite Angst, Thirsty Investors Have Names to Pursue

Estee Lauder, Kraft Heinz, and Dollar General are our top consumer defensive stocks.
Erin Lash, CFA

Industrials: Many Stocks Overvalued After Q3 Outperformance

Our top stocks in this sector are Chart Industries, Wesco, and CNH Industrial.
Brian Bernard, CFA, CPA

Basic Materials: Despite Index Rise, We See Multiple Long-Term Opportunities

In this sector, our favored stocks are Albemarle, Dow, and FMC.
Andrew Bischof, CFA and Travis Miller

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

Sponsor Center