CVS Turns in Strong Fourth Quarter
We expect to maintain our fair value estimate, and we still view shares as undervalued.
Narrow-moat CVS Health CVS turned in fourth-quarter operating results that slightly beat our expectations on the bottom line. With the company remaining on track to roughly meet expectations during its post-Aetna investment years, we expect to maintain our fair value estimate after these results, and we still view shares as undervalued. After acquiring Aetna in late 2018, we expect significant synergies and potential share repurchases (in future periods) to boost adjusted EPS growth toward the double-digits in 2022 and beyond.
In the quarter, revenue reached $66.9 billion, above Capital IQ consensus of $64.0 billion, and adjusted earnings per share hit $1.73, above consensus of $1.69. By segment, the PBM business delivered strong 10% growth in claims processed to 534 million in the quarter, but adjusted operating income grew only 2% to $1.4 billion due to ongoing pricing pressure. The retail/long-term care segment grew 3% year over year to $22.6 billion in sales, but adjusted operating income declined 4% to $2.0 billion in the quarter because of ongoing reimbursement pressure. Operationally, the retail stores remained strong with 3% same-store sales growth, a 7% increase in prescription volume, an 80-basis-point increase in U.S. prescription share to 26.8%, and 1% front of store growth. Legacy Aetna performed well, too, generating nearly 4% growth in medical membership to 22.9 million on particular strength in government plans, including the fast-growing Medicare Advantage market where Aetna grew over 30%.
For 2020, management highlighted guidance that looks roughly in line with our expectations after considering a dilution headwind. Specifically, the firm now expects EPS of $7.04-$7.17. Management noted that 2020 EPS would be negatively affected by about $0.08 of share-based compensation dilution because it is not repurchasing shares until it deleverages to its low-3s goal around 2022.
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