CVS Gets a Healthy Boost to Earnings

08/12/2020 5:00 am EST

Focus: HEALTHCARE

Taesik Yoon

Editor, Forbes Investor and Forbes Special Situation Survey

CVS Health (CVS) reported better-than-expected quarterly earnings, notes growth stock expert Taesik Yoon, editor of Forbes Investor.

Indeed, despite the Covid-19 pandemic, which resulted in reduced new therapy prescriptions from lower provider visits and less foot traffic in its stores due to shelter-in-place orders, Q2 revenues rose 3.0% year-over-year to $65.34 billion, which was over $1 billion more than what analysts had predicted.

This outperformance was driven by growth enjoyed across all three of its segments on solid demand for its specialty pharmacy offerings, brand inflation, a favorable pharmacy drug mix, and higher retail pharmacy prescription volume.

CVS also saw membership growth in its Health Care Benefits (HCB) segment’s Government products, and the favorable impact of the reinstatement of the health insurance fee (HIF) under the Affordable Care Act for 2020.

Further boosted by much lower utilization of medical services resulting from the deferral of elective procedures and other discretionary visits in its HCB business — which led to a medical loss (MLR) ratio of just 70.3% compared to 80.0% in the prior year — due to the pandemic, adjusted net income climbed 39.7% to $2.64 per share, trouncing the $1.92 consensus estimate.

Yet with the exceedingly low MLR in the quarter also indicating a backlog of medical procedures that are likely to be conducted in the coming months, its HCB segment will give back some of the strong growth in profits it enjoyed over the first two quarters in the second half of the year.

But this really shouldn’t surprise anyone, which is why CVS raised its full-year adjusted earnings guidance by just 10 cents from $7.04-7.17 to $7.14-7.27 per share, despite the 72-cent beat in Q2.

It’s also why we believe the more appropriate way to interpret this guidance is that CVS believes its operating performance to date along with its operating performance expected ahead will result in full-year earnings per share that are 10 cents stronger than what the company was expecting three months earlier.

And this is despite CVS now projecting a higher effective income tax rate, as well as continued significant COVID-19 related investments—including elevated operating costs—over the remainder of the year.

In fact, despite these additional headwinds, CVS clearly believes that it will be able to continue to add to the $10.4 billion in operating cash flow it has produced so far this year as it raised its full-year target by another $500 million to $11.0-11.5 billion. If so, we think the stock can go appreciably higher in the periods ahead.

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