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Stock Analyst Update

CVS Delivers Strong Q1 and Increases 2021 Outlook

We think shares still look undervalued.


Narrow-moat CVS Health (CVS) turned in first-quarter results that beat FactSet consensus and raised its 2021 EPS outlook slightly. At first glance, we do not anticipate changing our $92 fair value estimate materially based on this announcement, but CVS shares still appear moderately undervalued, in our opinion.

For the quarter, CVS beat consensus expectations substantially and raised its outlook slightly. Revenue reached $69.1 billion (4% growth), above FactSet consensus of $68.5 billion, and adjusted EPS grew 7% to $2.04, above consensus of $1.75. With this outperformance in the quarter primarily from the health insurance and pharmacy benefit management businesses, management raised its EPS outlook for 2021 to $7.56-$7.68 (1%-2% year-over-year growth) from $7.39-$7.55. Low-double-digit adjusted EPS growth may still have to wait until 2022, and CVS merely maintained its cash flow guidance for the year, which is the key driver of our fair value estimate. 

By segment in the quarter, challenges in CVS' stores were more than offset in its managed-care and PBM businesses. The retail segment grew 2% year over year on the top line, including same-store sales growth of 4% in the pharmacy and a decline of 11% in front of store on a tough comparable and a weak cold/flu season, which also contributed to the segment's adjusted operating income decline. The PBM grew 4% on the top line, including new client wins and growth in its relatively high-margin specialty pharmacy business, which also helped adjusted operating profits grow 28% along with better purchasing economics. Like many of its managed-care peers, CVS's health insurance operations grew substantially in government-sponsored programs but felt pressure from the weak economic environment in the commercial segment. Overall, legacy Aetna revenue grew 7% year over year, and its adjusted operating income grew 20%, including recent cost-saving initiatives.

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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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