Conservative · Stocks to Consider and Updates

CVS Beats Views; Lowers 2019 Outlook

Pharmacy operator CVS Health (NYSE: CVS – $64.98) said adjusted earnings came in at $2.14 a share for the fourth quarter, up from $1.92 last year and ahead of consensus of $2.06. Revenue was $54.42 billion, up from $48.39 billion a year earlier, also ahead of the Street projection of $53.78 billion. The Pharmacy Services business reported revenue of $34.9 billion in the quarter, up 2.2% from the previous year’s period. The Retail/Long Term Care segment revenues increased 5.4%. The increase in revenues was primarily driven by strong prescription volume and branded drug price inflation, partly offset by continued reimbursement pressure and the impact of recent generic introductions. Front store revenues improved compared to the prior year primarily driven by increases in over-the-counter health product sales. The company’s 2015 Omnicare acquisition continues to be a drag on results, however. Challenges in this business include lower occupancy rates in skilled nursing facilities, significant deterioration in the financial health of numerous customers and continued facility reimbursement pressures. During the fourth quarter, the LTC unit missed its forecast due to operational and customer liquidity issues, including one significant customer bankruptcy. CVS was forced to take an additional $2.2 billion impairment charge on the acquisition during the final quarter.

       As a result of the purchase of Aetna Inc., which closed November 28, 2018, the company established a new Health Care Benefits segment. Certain aspects of Aetna’s operations, including products for which the company no longer solicits or accepts new customers, such as large pensions and long-term care products, will be included in the company’s corporate/other segment. The company is calling for a “transitional year” ahead, which is not sitting well with investors and shares are trading about 7% lower. Management is now guiding full-year 2019 adjusted earnings of between $6.68 to $6.88 a share, missing forecasts for $7.34. However, healthy cash flow generation should enable management to deleverage the balance sheet as well as remain shareholder friendly as seen by the 2.9% dividend yield. CVS should capitalize on its new health initiatives over the longer-term and the shares are very reasonably valued at 9 times this year’s reduced earnings estimate, especially when viewed on a risk-adjusted basis.

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