What an incredibly horrific start to the year CVS Health Corp. (CVS, Financial) has had.
While the S&P 500 is up 14%, CVS’s stock is down 17%, mostly on the tail end of last months earnings release -- CVS posted non-GAAP earnings of $2.14, beating by 5 cents, but revenue fell short of expectations at $54.42 billion, despite increasing 12% year-over-year. GAAP earnings were negative because the company buying an insurance company and paying $70 billion tends to put a damper on real earnings in the short term, particularly when financed with debt and stock.
To reiterate what was said in my last article on CVS in January, with the combination of Aetna, the asset is twice as valuable. Again, it’s only a matter of time before the market revalues it higher, but investors are going to have to weather the current news cycle. With health care on the top of everyone’s agenda, from policy makers like Jeff, Warren and Jamie, to your grandmother, companies in this space are being forced to reconsider their pricing schemes.
In the end, even if prices come down (and maybe they should), it won’t matter to the profitability of CVS Health. CVS is definitely facing competition from many different sides, but investors have yet to see the cost efficiencies make their way through the company. Give it time.
On the topic of health care as a whole, few are talking about the lack of doctors. The glut that has prompted some colleges like New York University to offer free tuition at its medical school. Or, that the time and cost to bring a drug to market is a major reason the price is so high, even in generic form. Instead, people want free health care and cheap drugs to go along with tighter regulations.
For current CVS owners, the recent media attention is only a minor bump in the long-term road to much higher valuations. The market capitalization is $70 billion, which is what CVS paid for Aetna, and the stock is trading at five-year low. However, the company still has the largest retail pharmacy footprint, will still process over 1.4 billion prescriptions this year and still insures close to 20 million patients through Aetna, a number that should grow. If the company has to change how it delivers services in the future, it’s in a better position to do so post-acquisition.
Now is a perfect time to dollar-cost average or take a new position in the market leader while it’s down, but not out.
Disclosure: I am not long or short CVS.
