Summary
- CVS EPS guidance implies about 10% EPS growth rates, which we think is achievable thanks to improved insurance economics over the last years as well as retail recovery.
- COVID-19 related sales show uncharacteristic growth, but are expected to fall in 2023.
- Looking beyond 2023, we like that CVS is now pushing harder with inorganic growth given the multiple environment. They are likely to do another acquisition in addition to Signify.
- We should mention that CVS has lost an important PBM customer in Centene, and in 2024 that will come into effect and push down around 10% on EPS.
- Still, there can be growth in the meantime as well, especially as Signify Health is added to the assets. CVS is well managed, and we like the 10x multiple.
CVS Health ( CVS ) is a company most every US consumer knows. Earnings are coming up on the 8th of February, and with it high representation in indexes and importance in the healthcare chain, it's going to be an important day for markets. Earnings guidance is around $6.6 per share, and we think it's totally achievable. While there has been some bad news around a customer loss effective 2024, the increasingly growth-oriented profile with soon-to-be-added Signify Health ( SGFY ), which ensconces them in the home and further down the healthcare chain, mitigates the impacts that will be felt on growth rates, which will likely stay positive. The inorganic moves are well-timed and are a credit to management, and the low multiple makes it an attractive offering.
Notes on the Q3
As far as the health insurance products go, things are looking good. Medical benefit ratios are falling reflecting fewer COVID-19 related claims, and have overcome negative effects from Hurricane Ian. Moreover, the return profile of a typical insurance reserve portfolio is liable to improve in the current rate environment, with rolled over fixed-income investments likely having been skewed towards duration in this period.
In pharmacy services, which is primarily benefit management , revenues are up nicely on a growth in particular in specialty claims as diagnosis rates finally recover after hospitals were clogged with COVID-19, and claims generally have grown. As COVID-19 continues to attenuate into being a flu-like effect on the healthcare system, drivers of new diagnoses should continue to provide some momentum for the PBM results. However, it should be noted that in 2024 a contract with Centene ( CNC ) is not going to be renewed, and this will have a 10-20% EPS impact on earnings , with 10% being more likely as aspects of the loss can be mitigated. It's not insignificant.
In the retail segment, we see continued lift from COVID-19 despite it becoming less of a health concern, with good growth in test kits and other COVID-19 related products. While management models a 30% decline in these revenues in 2024, the fact that this didn't come sooner is appreciated and unexpected, as most COVID-19 exposed businesses have come off highs massively. Otherwise, a general recovery in retail traffic is a benefit to this segment.
Bottom Line
The EPS guidance will be hit in all likelihood. Things are incrementing well for the rest of the year.
Beyond 2022, the Centene loss is unfortunate, but other elements of the profile are likely to compensate for that loss. Signify Health adds a decent amount of new growth to the earnings profile, and the acquisition, despite incorporating a control premium, is a relative deal considering 2021 levels. Strategically it is also commendable, as it gets CVS into homes and starts establishing it as a direct giver of care in the home, on top of their MinuteClinic which provides walk-in care, and further strengthens their ability to leverage data , with yet another analytics platform and useful databases to add to the info they get from Aetna. They are likely to do another acquisition that establishes themselves further in primary care, and the logic continues to be to get to the patient early and connect them with the rest of their assets. This cross-sell approach is viable given CVS' scale. Hopefully the acquisition happens soon while multiples remain discounted.
The 2022 looks good, and with Signify likely to be value accretive, as well as any other acquisitions they do which can be easily financed by their continuously cash-generative business, the less than 10x PE multiple seems unjustified. There is opportunity in CVS, and we feel that in the execution of their strategy they are getting ahead of risks in having to compete on an epharmacy-only basis, which is looking less likely now, while also acquiring growth at quite reasonable prices. This is a buy.
For further details see:
CVS Should Have No Problem Delivering 10% EPS Growth