CVS Health (NYSE:CVS) beat market estimates for sales in its May 6 report but the share fell 5% anyway. The CVS stock price has eked out a 3% gain since its mid-March low, while the S&P 500 index is up 5.1% in the same seven or so weeks.
That report? Earnings of $2.01 billion, $1.53 per share fell short of estimates for $1.70 a share of earnings. But revenue of $66.75 billion was well ahead of estimates for $62.61 billion.
Revenue gains were strongest on the insurance side of the house, the former Aetna. Earnings gains were strongest in what it called the retail and long-term care segment, which includes its in-store clinics.
Initial reports had earnings of $1.91 a share, which would have beat even the whisper number. This was adjusted income, including some non-GAAP items related to the Aetna deal and amortization of intangible assets.
Is the Aetna Deal Working?
CVS Health made itself unique in 2018 by paying $69 billion for Aetna. At the time, Aetna was one of four large health insurers left behind by the growth of United Healthcare (NYSE:UNH).
The deal came about after the four laggards were kept from merging with each other by the Obama administration. The other three — Cigna (NYSE:CI), Anthem (NYSE:ANTM) and Humana (NYSE:HUM) — remain independent. Only Humana has outperformed UNH over the last two years, but the others have all outperformed CVS.
CVS is now larger than UNH in terms of annual revenue, $256 billion to $240 billion, but has less than half of its new rival’s net income. The goal has been to deliver managed care through CVS pharmacies and, eventually, better value from insurance operations. That goal has yet to be achieved, although UNH has moved into managed care in recent years, following CVS’ lead.
For investors, this has given CVS stock a better performance than Walgreens Boots Alliance (NASDAQ:WBA), formerly its drug store doppelganger. Over the last two years CVS shares are down 4%, while Walgreens is down by more than a third. But health insurance, by itself, remains a better business.
Pandemic’s Front Lines
Partly because of the Aetna deal, and partly due to its niche in pharmacy, CVS can afford its 50 cents per share dividend payout during the novel coronavirus pandemic. Its full-year guidance on earnings remains unchanged, at $5.47-$5.60 per share diluted and $7.04-$7.17 per share adjusted.
During the first quarter CVS Health saw both higher prescription and in-store revenue, and lower benefit costs. April results show a “new normal” of lower merchandise sales and higher pharmacy sales.
Patients are focused on Covid-19 and putting off dealing with other medical problems. CEO Larry Merlo expects the second quarter to represent a “trough” in results. But that’s much better than the disaster other retailers are predicting.
Analysts are divided on how to look at this. Some warn of mounting costs and a retail collapse, telling growth investors to avoid the stock. Others see a promising technical chart, a stock poised to move higher. Still others see a cheap insurer trading at less than 10 times earnings, half what UNH is selling for.
Bottom Line on CVS Stock
My own view on CVS stock is that the managed care era it was built for has yet to appear.
Health insurers are raking in profits under Trump, and anger at this fueled the rise of Bernie Sanders. His failure to beat Joe Biden for the Democratic nomination, in turn, gave more fuel to the insurers. Biden is considered friendlier to the industry.
But within the industry, managed care is the trend. CVS stores and clinics should, over time, give it lower costs for chronic care. Other insurers must pay third parties for this care. That’s why I have been recommending CVS for over a year. It’s why I finally bought shares for my own retirement account.
That investment has delivered a tiny, but real profit, and a dividend yield of 3.3%, easily beating a U.S. government bond. In the present market, which still may be taken down by a second wave of coronavirus infections, that’s value worth buying.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in CVS.