Morningstar

CVS Turns in Strong Third Quarter, Boosts 2019 Outlook

We view shares of the narrow-moat firm as undervalued.

Securities In This Article
CVS Health Corp
(CVS)

Narrow-moat CVS Health CVS turned in third-quarter operating results that beat Capital IQ consensus on the top and bottom lines. With those strong trends, management raised some metrics of its 2019 outlook slightly, although its cash flow guidance did not change. Overall, we continue to view CVS' shares as undervalued. We see compelling cross-selling opportunities and other synergies as the organization integrates the Aetna insurance operations with its legacy retail store and pharmacy benefit management businesses.

In the quarter, revenue reached $64.8 billion, above consensus of $63.0 billion, and adjusted earnings per share grew 6% to $1.84, above consensus of $1.77. While about $0.04 of that is related to a capital gain and positive prior-year development, the company's underlying businesses performed well, too. Management raised adjusted EPS guidance to $6.97-$7.05 from $6.89-$7.00. However, its guidance for operating cash flows ($10.1 billion-$10.6 billion) and capital expenditures ($2.3 billion-$2.6 billion), which is the primary driver of our fair value estimate, did not change.

By segment, CVS' PBM business delivered strong 9% growth in claims processed to 510 million in the quarter on an adjusted basis, but adjusted operating income grew only 6% to $1.4 billion due to ongoing price compression. The retail/long-term care segment grew 3% year over year to $21.5 billion in sales, but adjusted operating income declined 7% to $1.5 billion in the quarter due primarily to reimbursement pressure. Positively, though, the retail store operations remained strong with an 8% increase in prescription volume and a 110-basis-point increase in prescription share in the United States to 26.6%. In the legacy Aetna operations, the company generated $17 billion in sales and adjusted operating income of $1.4 billion, which management highlighted as beating internal expectations.

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About the Author

Julie Utterback, CFA

Senior Equity Analyst
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Julie Utterback, CFA, is a senior equity analyst, AM Healthcare, for Morningstar*. She focuses on medical technology and service companies. She covers managed care organizations including UnitedHealth, service providers like HCA, medical suppliers such as Baxter, and life sciences companies like Danaher. She is also the chairperson of the equity research team’s capital allocation methodology.

Before joining Morningstar in 2005, Utterback was an equity analyst at State Farm Insurance for several years. Utterback joined Morningstar in 2005 as an equity analyst in the healthcare industry, and initially she primarily covered medical technology companies, including orthopedic device, medical equipment, and cardiac device firms. In 2010, she joined Morningstar's credit research team, initiating coverage of the entire healthcare industry and generally helping the organization expand and maintain its credit coverage across many industries. She held that senior credit analyst role until April 2019, when she returned to the equity team to cover medical technology and service companies.

Utterback holds a bachelor's degree in finance from the University of Illinois Urbana-Champaign’s Gies College of Business. She also holds the Chartered Financial Analyst® designation.

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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