Skip to Content
Stock Analyst Update

CVS Turns in Strong Third Quarter, Boosts 2019 Outlook

We view shares of the narrow-moat firm as undervalued.

Mentioned:

Narrow-moat CVS Health (CVS) turned in third-quarter operating results that beat Capital IQ consensus on the top and bottom lines. With those strong trends, management raised some metrics of its 2019 outlook slightly, although its cash flow guidance did not change. Overall, we continue to view CVS' shares as undervalued. We see compelling cross-selling opportunities and other synergies as the organization integrates the Aetna insurance operations with its legacy retail store and pharmacy benefit management businesses. 

In the quarter, revenue reached $64.8 billion, above consensus of $63.0 billion, and adjusted earnings per share grew 6% to $1.84, above consensus of $1.77. While about $0.04 of that is related to a capital gain and positive prior-year development, the company's underlying businesses performed well, too. Management raised adjusted EPS guidance to $6.97-$7.05 from $6.89-$7.00. However, its guidance for operating cash flows ($10.1 billion-$10.6 billion) and capital expenditures ($2.3 billion-$2.6 billion), which is the primary driver of our fair value estimate, did not change. 

By segment, CVS' PBM business delivered strong 9% growth in claims processed to 510 million in the quarter on an adjusted basis, but adjusted operating income grew only 6% to $1.4 billion due to ongoing price compression. The retail/long-term care segment grew 3% year over year to $21.5 billion in sales, but adjusted operating income declined 7% to $1.5 billion in the quarter due primarily to reimbursement pressure. Positively, though, the retail store operations remained strong with an 8% increase in prescription volume and a 110-basis-point increase in prescription share in the United States to 26.6%. In the legacy Aetna operations, the company generated $17 billion in sales and adjusted operating income of $1.4 billion, which management highlighted as beating internal expectations.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Julie Utterback does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.