CVS Health Has Q2 That Beats Expectations
However, investors may be disappointed that CVS backed off its 2022 goal of double-digit earnings growth.
Narrow-moat CVS Health (CVS) turned in second-quarter results that beat expectations and raised its 2021 outlook slightly. At first glance, we plan to boost our $92 fair value estimate by the low single digits on a percentage basis to account for recent trends and potential policy change benefits in the long run. However, investors may be disappointed that CVS backed off its 2022 goal of double-digit earnings growth on the call.
For the quarter, CVS beat consensus expectations substantially and raised its outlook. Revenue reached $72.6 billion (11% growth), above FactSet consensus of $70.2 billion, and adjusted EPS reached $2.42 (above consensus of $2.07) on better-than-expected results from the pharmacy benefit management and retail segments. With that strong performance, management raised its 2021 EPS outlook to $7.70-$7.80, or 3%-4% growth (up from 1%-2% growth previously and flat to declining growth originally). We were also pleased to see CVS increase its 2021 guidance for cash flow, the key driver of our fair value estimate, to $12.5 billion-$13.0 billion on an operating basis, up $0.5 billion on both ends of its previous outlook range. We plan to raise our 2021 cash flow estimate.
By segment in the quarter, CVS faced a tough comparable in medical insurance and an easy comparable in retail. In medical insurance, revenue rose 11% year over year as Medicare-related businesses grew. However, as medical utilization trends bounced back from the trough in the second quarter of 2020, that segment's adjusted operating income fell 53% year over year. The retail segment helped more than offset that weakness with 14% top-line growth and 94% adjusted operating income growth off an easy comparable and COVID-19 vaccination activity, although the latter may not repeat in future periods. Also, the PBM grew 10% on the top line and 32% on an adjusted operating income basis on new client wins on inflation controls and growth in its relatively high-margin specialty pharmacy business.
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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.