CVS Health Corp (CVS) Stock Is a Black-and-Blue Buy Now

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Analysts looking at CVS Health Corp (NYSE:CVS) entered its earnings period with a healthy dose of skepticism. CVS stock was down 20% over the past six months, as revenue growth seemed to stall and earnings began falling. Its rebranding has it seen as a health care stock, rather than a retailer. But now that healthcare is out of favor, it’s suffering for that.

The company has already responded to earnings pressure by laying off 600 people, almost half of them at its Rhode Island headquarters. Analyst estimates for the quarter were modest — $1.57 per share in earnings on $45.31 billion in revenue — and some were calling the company oversold.

But apparently, CVS stock wasn’t oversold enough.

CVS Earnings Beat, But …

CVS did handily beat expectations on earnings for the quarter ending in September, with net income of $1.54 billion, or $1.64 per share. However, revenue fell short of expectations, at $44.615 billion.

The fans were not cheering. The bottom-line beat was based in part on a favorable tax ruling that wasn’t expected to come down until the fourth quarter, adding 5 cents per share to earnings. Without it, earnings were just 2 cents per share ahead of expectations. CVS also cut its earnings guidance for the year, from a range of $4.92-$5 per share to a range of $4.84-$4.90. The company also said next year’s earnings should only advance about 20 cents per share from that figure.

The press release was downbeat, too. CEO Larry Merlo wrote that “very recent pharmacy network changes in the marketplace are expected to cause some retail prescriptions to begin migrating out of our pharmacies this quarter” and that “we are currently experiencing slowing prescription growth in the overall market.” During the quarter, CVS opened 48 new outlets and closed 6, while relocating another 11.

CVS stock crashed again in response, falling almost 15% in premarket trade.

The good news is that new investors will now find a better yield than the previous 2.04%. The bad news is that anyone who bought the stock over the last year, like me, is completely out of the money.

Time to Give Up?

CVS made big news a few years ago when it dropped cigarettes from its stores, rebranding itself as CVS Health. This seemed to have no impact on near-term results, and the shares rose through the middle of 2015, reaching a high of over $112.

CVS stock is now down 30% from those highs, and analysts are now concerned that the rebranding may have cost it revenue in the front of the store while having no positive impact in the back, where the prescriptions are dispensed.

CVS is now the big dog of the retail pharmacy business, with 9,694 outlets, including former Target Corporation (NYSE:TGT) pharmacies acquired last year. It also owns Caremark, the second-largest pharmacy benefitmManager (PBM) behind Express Scripts Holding Company (NASDAQ:ESRX), and Merlo said those results were good.

The company is backing the stock with share repurchases. CVS still had $3.7 billion in share repurchase authorizations available at the end of September, and the board backed another $15 billion, which given the company’s market cap of roughly $80 billion as trade opens on Nov. 8, should provide firepower against a collapse.

Investors are dumping a company that achieved $7.948 billion in cash flow from operations during the last three months, and which had same store sales growth of 2.3%. The guidance on free cash flow was raised, to a range of $6.8 billion-$7 billion.

The company’s two 2015 acquisitions — the former Target pharmacies and Omnicare, a long-term care operation — both seem to have a long-term future.

Investors who bought the original CVS Health rebranding, like this investor, have been burned for their optimism. But CVS stock is now going to trade at something closer to Wal-Mart Stores, Inc. (NYSE:WMT) levels, and is the Walmart among drug stores.

Maybe it’s actually time to buy.

Dana Blankenhorn is a financial journalist and author of the science fiction story Into the Cloud. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he was long CVS.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.

 


Article printed from InvestorPlace Media, https://investorplace.com/2016/11/cvs-health-corp-cvs-stock-black-blue-buy-iplace/.

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