CVS (CVS 64.63, -5.25, -7.51%) is having its worst day in over two years
after the company beat fourth quarter estimates but offered disappointing
earnings guidance for 2019.
Fourth quarter adjusted EPS grew 11%, but the company reported a GAAP net loss that included a $2.2 bln goodwill impairment charge for its long-term care (LTC) segment.
Revenue grew 12.5%, driven by increased pharmacy network claims in the Pharmacy Services segment, increased prescription volume in the Retail/LTC segment, and the addition of Aetna. Growth was offset by continued price compression in the Pharmacy Services segment and reimbursement pressure in the Retail/LTC segment, as well as by increased generic dispensing.
CVS noted that the LTC business continued to experience industry-wide challenges that have impacted the company’s ability to grow the business at the rate that was originally estimated upon the acquisition of Omnicare in 2015. Challenges include lower occupancy rates in skilled nursing facilities, significant deterioration in the financial health of numerous skilled nursing facility customers, which resulted in a number of customer bankruptcies in 2018, and continued facility reimbursement pressures.
During the fourth quarter, the LTC reporting unit missed its forecast primarily due to operational issues and customer liquidity issues, including one significant customer bankruptcy. Additionally, LTC management submitted an updated final budget for 2019 which showed significant additional deterioration in the reporting unit's projected financial results. The company recorded a $3.9 bln goodwill impairment charge in the second quarter of 2018 and announced another $2.2 bln goodwill impairment charge for the segment this morning.
Focus on the company's initial forecast for fiscal 2019 was especially keen given that the outlook followed and would encompass the company’s acquisition of insurer Aetna, which was completed late last year. The outlook disappointed, calling for adjusted EPS of $6.68-6.88, down 4% year/year, 8% below consensus at the midpoint. CVS also guided Q1 EPS and revenue below consensus.
The $70 bln acquisition of insurer Aetna makes 2019 a transition year for CVS. The deal helps the company diversify against the retail and pharmacy businesses that face increased competition from the likes of Amazon (AMZN). The aforementioned price compression and reimbursement pressures in the company’s Pharmacy Services and Retail/LTC segments, respectively, have generated margin pressures for CVS.
There are a ton of moving parts to the CVS story, but the weak outlook has market participants selling this morning despite the cheap valuation.
Wells Fargo downgraded the stock in response to the poor results this morning, citing a lack of stabilization in existing businesses.
With an ~$83 bln valuation, CVS trades at ~9x EPS. That represents a discount to Walgreens Boots (WBA 71.70, -2.73, -3.67%) at ~11x and to health insurers, which trade with a mid-teens multiple on average.
The stock has been trending steadily lower since peaking in 2015 and now finds itself testing support in the narrow mid-$60 range that has contained its trading for the last two months.
- OUR VIEW
- LEARNING CENTER