Story Stocks^®

CVS Health (CVS -3%) is slipping to new 52-week lows today as its trimmed FY23 adjusted earnings outlook takes center stage, shrouding the retail pharmaceutical giant's top and bottom line beats in Q1. CVS's reduced FY23 earnings forecast of $8.50-8.70, down from $8.70-8.90, resulted from an approximately $0.35/share headwind from the associated financing of its $10.6 bln Oak Street Health $8.0 bln Signify Health purchases, which both closed recently. The headwind was partially offset by underlying strength across CVS's businesses.

Incorporating today's move, shares of CVS have now tumbled over 24% on the year, dwarfing rival Walgreens Boots Alliance's (WBA) ~13% decline. CVS has faced intense scrutiny over its recent high-price tag acquisitions, especially since they followed the company's reduced 2023 Star Rating for its Aetna National PPO plan, which stoked fears of missing bottom-line estimates. Although CFO Shawn Guertin repeatedly noted that CVS is taking the appropriate measures to mitigate any potential impacts, heightened M&A activity only increased the possibility of the company falling short of its EPS targets.

Therefore, by CVS cutting its FY23 adjusted EPS projection by $0.20, investors' worries came to a head today, sparking additional selling pressure.

• It was not all doom and gloom, though. CVS kept its bottom line from slipping extensively in Q1, experiencing just a 1.0% decline yr/yr to $2.20. The company also grew its revs more than twice the rate analysts expected, boasting 11% yr/yr growth to $85.28 bln.
• CVS also announced resegmentation, reporting its results through three primary segments: Health Care Benefits, Health Services (formerly Pharmacy Services), and Pharmacy & Consumer Wellness (formerly Retail/LTC).
  • A notable highlight was within Health Benefits, where medical costs were kept in line with expectations, with membership expanding by 1.0 mln members. CVS also expects roughly 12% membership growth in its Medicare Advantage (MA) business in FY23 and is working to improve its competitive position to return to market growth in 2024.
  • Additionally, Pharmacy & Consumer Wellness revs grew by nearly 8% yr/yr despite macroeconomic challenges and normalizing COVID trends, with front store comps reaching almost +8%.
• Although FY23 is shaping up to be less upbeat than initially anticipated, CVS did reiterate its $9.00 and $10.00 earnings targets for 2024 and 2025, respectively. However, the company cautioned that recent developments in the 340B Drug Pricing Program create challenges for its pharmacy benefits business. Furthermore, COVID contributions could dissipate more rapidly than previously thought.

Overall, CVS's Q1 numbers underscored a reasonably resilient economic backdrop. Also, its clipped FY23 earnings guidance resulted from an early close of Oak Street and financing costs for its two major acquisitions instead of underlying weakness within the general economy. Meanwhile, CVS remained committed to its FY24 and FY25 earnings targets. Therefore, we think today's selling pressure is an overreaction. CVS's recent M&A moves will provide extensive diversification, taking pressure off its slowing retail business, and give the company added credibility in the MA space.