CVS Health (NYSE: CVS) faces two distinct headwinds that are putting pressure on CVS stock.
First, markets are cautious over the drug store and drug manufacturing market as the government pressure all players to lower drug prices.
Doubts over CVS’ acquisition of Aetna are adding more distractions for management in the near-term. With CVS stock testing the $51.72 yearly low on at least five occasions since March, what will it take for the stock to rebound?
CVS reported first-quarter earnings of $1.62 and also raised its full-year adjusted EPS guidance to $6.75 to $6.90. This is up from the previous guidance of $6.68 to $6.88 a share.
The Q1 beat and improved outlook are due largely to the inclusion of managed care operations. The company also included revenue from SilverScript Medicare Part D, which contributed $17.9 billion of revenue for the quarter.
Better synergies with Aetna also contributed favorably to the higher outlook. CVS expects it will exceed its target savings of $750 million in 2020. It found synergies stemming from the elimination of duplication in corporate and operational functions, medical cost savings such as formulary alignment, and purchasing efficiencies. By 2022, CVS forecast saving $1.5 billion to $2 billion, well above its deal synergy targets.
CVS forecast cash flow of between $9.8 billion and $10.3 billion and will use $4.2 billion to $4.6 billion to pay down its debt. Its debt/equity of 1.25 times is above that of Cigna Corporation (NYSE: CI) at 0.95, and UnitedHealth (NYSE: UNH) at 0.74, both of which are attractive investments.
Despite the less favorable debt/equity, CVS Health pays a dividend yielding 3.69%. Walgreens Boots Alliance (NASDAQ: WBA) also has a lower debt/equity of 0.73 but its dividend is slightly lower too, at 3.35%.
Value Investing Opportunity
Investors who think that CVS has deep value with a forward P/E of 7.6 times are betting the company will mitigate near-term headwinds hurting the business. In Q1, prescription growth of 5.5% benefited from the support of clinical care programs and network relationships.
The company will improve margins in its long-term care business. And with PBM, the idea of a net cost pricing model is resonating with clients. Some clients will adapt to this offering while CVS expects its uptake improving in 2020 and beyond.
CVS is testing new approaches in delivering and managing health care. Its Houston HealthHub stores bring health care services into communities. Meeting people where they are should drum up more business.
Still, CVS will primarily use data and analytics to deliver such services at the best cost. Plus, it has a long-term vision of seamlessly connecting consumer experiences across digital and clinical interactions.
Initial results from the Houston stores are encouraging. The locations are performing better than expected, giving the company the green light to expand the HealthHUB model.
Although CVS Health’s market share stood at 26.2% in the first quarter, front store comparable sales rose just 0.4%. Adjusted operating income from Retail/Long-term care dropped 18.9%. Reimbursement pressure, higher legal costs, and higher expenses weighed on Q1 results.
Should costs grow higher than expected in the course of this year, CVS may lower its guidance. Fortunately, synergies from the Aetna acquisition are tracking higher than the company expected. HealthHUB is resonating well with customers. This is encouraging the company to add more net new items in the front-store of the self-care and wellness areas. Along with expanding MinuteClinic services, CVS will continue expanding the interactions between pharmacists and patients who need it most.
The 14 analysts offering a price target on CVS stock have an average price of $70.18, which is ~30% above the recent closing price of $54.17. Conversely, investors could assume a perpetuity growth rate of between 5% and 6% in the 5Y DCF Growth Exit model. In this scenario, the fair value of CVS stock is $63 a share, implying an upside of 16% for investors (per finbox.io).
Your CVS Stock Takeaway
The CVS and Aetna deal is getting challenged. Investors could bet that the court lets the deal close. More importantly, CVS is already reaping the benefits of the combination by cutting costs. By delivering better services to the customers it services, the company will keep growing.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.