CVS Earnings: Solid Results Overshadowed by Reduced 2023 Outlook on Quick Oak Street Close

Narrow-moat CVS Health CVS delivered slightly-better-than-anticipated first-quarter results, but as we highlighted as likely in a late March note, the firm pushed down its guidance for 2023 earnings after closing the loss-generating Oak Street acquisition earlier than expected. Considering the better-than-expected first-quarter results, though, the firm’s new 2023 outlook is slightly higher than what we started modeling in late March after the initial Oak Street announcement, and our $113 fair value estimate remains intact. Shares appear significantly undervalued to us.

In the quarter, CVS turned in a solid result, especially when considering the tough comparable period last year when the omicron variant surge helped results, particularly in its retail stores. While the retail operations profits contracted year over year, the pharmacy benefit manager (now in a segment with healthcare services) delivered midteens profit growth, including strong specialty results. Also, the firm’s medical insurance business delivered solid membership growth (4%) on stellar individual exchange growth and decent Medicare Advantage growth, despite its weak MA Star ratings. However, increasing medical utilization constrained profits in the medical insurer this quarter, although within management’s expectations.

As we previously expected, CVS reduced its guidance for adjusted earnings in 2023, and it now expects $8.50-$8.70, down from $8.70-$8.90 previously, primarily on the change of the Oak Street deal timing. The bottom end of that new range was only $0.03 higher than what we started modeling in March and was positively affected by a stronger-than-anticipated first quarter. Also, the company maintained its operating cash flow guidance for the year at $12.5 billion-$13.5 billion, which looks stronger than what we started modeling in March, too. Mildly boosting our profit and cash flow estimates for 2023, though, does not materially affect our fair value estimate.