Favorable Tax Developments Boost CVS Outlook
We continue to view shares as undervalued for the narrow-moat company.
Narrow-moat CVS Health (CVS) turned in second-quarter operating results that beat expectations and allowed the firm to boost its 2020 outlook. After making similar changes to our expectations for 2020, our fair value estimate did not change materially. We continue to view shares as undervalued, though, recently trading at just 9 times 2020 expected earnings and offering a 3% dividend yield.
CVS' second-quarter results beat expectations primarily because of lower utilization of medical services, which provided a cost benefit to the insurance operations it acquired from Aetna in 2018. In the quarter, revenue reached $65.3 billion (3% growth), above Capital IQ consensus of $64.3 billion, and adjusted earnings per share hit $2.64 (40% growth), above consensus of $1.92. Management estimates that COVID-19 positively influenced its adjusted EPS by $0.70-$0.80 in the quarter. Also, a favorable tax resolution with state and local governments added about $0.10 to the company's bottom-line in the quarter, which was the primary reason CVS increased its guidance for the full year.
For 2020, management raised its outlook for EPS and operating cash flow slightly on the quarter's results, as it expects some offsets later in the year to recent COVID-19 benefits. For 2020, CVS now expects adjusted EPS of $7.14-7.27, up from $7.04-$7.17 previously, and operating cash flow of $11.0 billion to $11.5 billion, up from $10.5 billion-$11.0 billion previously. We have raised our outlook for 2020 in line with that new guidance. However, we have not changed our assumptions beyond that and noted that management still appears to be working toward goals laid out in previous investor events. Specifically, the company expects modest EPS growth in the next couple of years and is only working toward double-digit earnings growth by 2022. That is a standard that its insurance peers are achieving now, and we suspect CVS' shares may remain constrained until it can materially accelerate profit growth.
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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.