What happened
Despite
a bull market this year and strong gains in the S&P 500, CVS
Health (NYSE: CVS) nonetheless gave up 17% in the first six
months of 2019, according to data from S&P Global
Market Intelligence, as the company gave weak earnings guidance for
2019 and faced questions about reimbursement rates and its Aetna acquisition.
As you
can see from the chart below, CVS stock fell sharply through late February and
early March after the company offered a disappointing outlook for 2019.
CVS
stock fell 8% on Feb. 20 after its fourth-quarter earnings came out. The
company actually beat expectations, posting revenue growth of 12.5%, boosted by
the Aetna acquisition, to $54.4 billion, ahead of estimates at $53.76 billion.
And adjusted earnings per share rose from $1.92 to $2.14, topping expectations
of $2.06.
However,
investors were thrown off by the pharmacy chain's outlook for 2019. It
projected adjusted EPS of just $6.68 to $6.88, down from $7.08 in 2018 and well
below the analyst consensus at $7.34. Its first-quarter EPS guidance of $1.49
to $1.53 was also short of estimates at $1.67. Management said that 2019 would
be a transitional year for the company and that it was "aware of certain
headwinds," including pharmacy reimbursement rates, and it acknowledged a
declining benefit from new generics and lower brand inflation.
Following
the earnings report, the stock continued to slide as rival Walgreen's warned on reimbursement rates and signaled that it might
not meet its full-year earnings guidance, showing headwinds across the
industry.
CVS
briefly regained some of those losses when it reported first-quarter earnings
on May 1, rising 5.4% as the company beat estimates on both top and bottom lines
and raised its full-year adjusted EPS guidance to $6.75 to $6.90. Though the
report seemed to ease some of the market's doubts about the Aetna acquisition
and the company's path forward, the stock slipped in the days following the
report and continued trading in the $51-to-$55 range it had been since March.
Now what
In
July, the pharmacy chain got another boost after the Trump administration backed away
from a plan to end certain drug rebates as part of its strategy to lower drug
prices. That was good news for CVS, the nation's largest pharmacy benefits
manager, which gained 4.7% on July 11 when the news broke.
The
stock continues to look like a value play, trading at a P/E under 9 based on
this year's earnings, with management promising $800 million in synergies from
the Aetna acquisition and double-digit earnings growth by 2022. Though the
market remains skeptical of the pharmacy industry for a number of reasons,
including e-commerce competition and pressure on reimbursement rates, CVS stock
should eventually bounce back.
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