CVS Guides Cautiously for 2021 After Strong 2020
The narrow-moat company beat our expectations, and we are keeping our fair value estimate at $92 per share.
Narrow-moat CVS Health (CVS) turned in fourth-quarter and 2020 results that beat our expectations, especially on the cash flow front, but its outlook for 2021 appears cautious. After incorporating the cash flow outperformance in 2020 into our model, we are keeping our fair value estimate at $92 per share after mildly trimming our 2021 estimates. The shares remain undervalued, in our opinion, and the market may continue to discount them until CVS materially accelerates its earnings growth on a sustainable basis.
For the quarter and full year, CVS beat our expectations substantially. In the quarter, CVS revenue reached $69.6 billion (4% growth), above FactSet consensus of $68.8 billion, and adjusted EPS hit $1.30, above consensus of $1.23. CVS also turned in much higher cash flows than previously anticipated, with 2020 operating cash flow of $15.9 billion, well above its most recently raised guidance of $12.75 billion-$13.25 billion.
With this outperformance in the fourth quarter, we were surprised that management's guidance for 2021 was so cautious. In 2021, the company expects $7.39-$7.55 of adjusted EPS (4%-6% above its 2020 baseline of $7.10, which management continues to view as its jumping-off point after adjusting for COVID-19-related benefits and a recent divestiture), or slightly below our previous estimate of $7.58. Its operating cash flow range of $12.0 billion-$12.5 billion was also slightly below our previous expectation of $12.6 billion for 2021. Overall, management expects the ongoing pandemic to have a neutral effect on the company in 2021 with benefits in the retail/long-term care segment offset by challenges in the health insurance operations related primarily to higher than previously expected Medicare-related payments, which most other insurers have highlighted as a headwind for 2021. Positively, management also said its long-term goal of returning to low-double-digit adjusted EPS growth by 2022 remains the company’s target.
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Julie Utterback does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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