In early March, I thought that CVS Health Corp. (CVS, Financial) might be a good place to avoid negative impacts from the Covid-19 pandemic. The company’s leadership position in pharmacy prescriptions helps insulate it from the economic fallout of the country shutting down. While shares are down approximately 1.4% since my previous article on the topic, the company’s first quarter earnings report reaffirms my belief that CVS Health will continue to perform well in the future.
First-quarter highlights
CVS Health reported its first-quarter earnings on May 6. Revenue grew 8.3% to $66.8 billion, which was $2.6 billion above what the analyst community had forecasted. Net income increased 41%. Adjusting for acquisition-related integration costs and store rationalization charges, earnings-per-share increased nearly 18% to $1.91 for the quarter. This was $0.28 above estimates.
Source: CVS Health Corporation’s First Quarter Earnings Presentation, slide 13
The company estimates that increased demand for products resulting from the pandemic added ~$0.10 to results as consumers forwarded purchased medications. Removing this gain, EPS still increased almost 12% year-over-year.
The Pharmacy Services segment had a 12.4% increase in pharmacy claims processed, up to 541.4 million. This helped lead to an improvement of 4.2% in total revenues and a 24.7% improvement in adjusted operating income. Specialty pharmacy volumes, buoyed by CVS Health’s agreement with pharmacy benefits manager IngenioRx back in 2017, was the primary driver of growth in the quarter. Also aiding results was a significant increase in the number of 90-day prescriptions filled. The company estimates that Covid-19 added ~125 basis points to the process claims total. Removing this, total pharmacy claims were still higher by more than 11%, showing that demand for CVS Health’s services remain in very high demand even under difficult circumstances.
The Retail/Long-Term-Care segment had revenue growth of 7.7%, and adjusted operating income was higher by 27.7%. CVS Health stated that forward purchasing related to Covid-19 accounted for 40% of the growth in operating income. Prescriptions filled for this segment improved more than 8% to 375.1 million due to a combination of patient care programs and forward purchasing of medications. Aside from prescription gains, front store revenues were solid, up 2% from the prior quarter.
CVS Health’s share of the pharmacy script increased 50 basis points to 26.8%. This means that CVS Health now has the largest share of the pharmacy script business in the U.S.
The Health Care Benefits segment had a 7.4% increase in total revenue. Medical membership increased 2.8% to 23.5 million people, mostly due to growth in government membership. A decline in commercial insured products and higher Medicaid benefit costs led to a 4.5% decrease in adjusted operating income though.
CVS Health also discussed April results, which will count towards second quarter figures. For the month, same-store sales were up 1.4% overall. Pharmacy sales remained solid, with 5.2% growth compared to April 2019. Pharmacy Services claims increased just 0.6%. On the other hand, front store sales decreased nearly 11% while prescription volumes were down 0.6%. Larger basket size was more than offset by a decrease in traffic as consumers stayed home. Fewer routine physicians visit and pull ahead purchases led to lower prescription growth. In comparison, same-store sales were up 17.5% in March, led by an 18.6% increase in front store sales and a 17.2% improvement in pharmacy sales.
In my view, CVS Health is well-positioned to navigate the pandemic, as it has plenty of cash and liquidity. The company ended the quarter with $8 billion in cash and short-term investments on its balance sheet and expects cash flow from operations of $10.5 billion to $11 billion for the year. Free cash flow more than doubled to $2.6 billion in the first quarter. CVS Health also borrowed $6 billion under its backup credit facilities. This should enable the company to remain financially sound.
Unlike many companies that have already reported first quarter earnings, CVS Health reaffirmed its guidance for the year and expects adjusted EPS in a range of $7.04 to $7.17 for the year.
Using Thursday’s closing price of $61.45 and the midpoint for expected adjusted EPS of $7.11, CVS Health trades with a forward price-earnings ratio of 8.6. This is well off the stock’s 10-year average price-earnings ratio of 14.1 and looks even cheaper compared to the average price-earnings ratio of 20.1 for the S&P 500.
In light of the quarterly report, I continue to believe that shares are worth 12 to 14 times earnings. This would result in a share price of $85 to $100 using the midpoint for guidance, which is at least a 38% gain from the current share price. Shares also have a dividend yield of 3.3%.
Final thoughts
CVS Health performed about as well as could be hoped as the pandemic spread across the country. Top and bottom-line results were strong, aided in part to forward purchasing. Adjusting for this, revenue and earnings would still have been very solid.
I take comfort in the fact that CVS Health reaffirmed its guidance for the year. The company also has plenty of cash and borrowing capacity. Thus, I continue to view CVS Health as a strong buy.
Author disclosure: The author is long CVS Health.
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