Analysts Downplay Stock Selloff Following CVS 4Q Earnings Report

by Leslie Small

Although CVS Health Corp.'s stock price dropped about 5% after the company reported its fourth-quarter and full-year 2020 financial results on Feb. 16, equities analysts seemed to be unshaken in their view that the firm — which owns health insurer Aetna — has strong fundamentals.

For the fourth quarter of 2020, CVS's net income of $975 million was down 44% compared with the prior-year period, a result the company partially attributed to lower operating income driven by the impact of the COVID-19 pandemic on its Health Care Benefits and Retail/Long-Term Care segments. For the full year 2020, CVS's operating income and net income increased relative to 2019.

Total revenues in the fourth quarter and full-year 2020 increased 4% and 4.6%, respectively, compared with the prior year, according to CVS's earnings release. The company's fourth-quarter adjusted earnings per share of $1.30 beat the Wall Street consensus of $1.24.

In a Feb. 17 note, Citi analyst Ralph Giacobbe said his firm views CVS's results "as generally balanced, with better performance within PBM and health benefits, and in line for its retail segment." Nevertheless, he acknowledged that "we received a number of calls/emails on the heels of the CVS 4Q20 print/guidance and the subsequent sell-off in shares."

In their own Feb. 17 note, Evercore ISI analysts weighed in that "CVS's stock price is down ~5% as we write, which seems overdone to us." The company's 2021 guidance "was in-line with prior commentary, which makes sense given that there is little incentive to be aggressive at this point in the year and with Karen [Lynch] just taking over the reins," they added. Lynch, formerly president of Aetna, replaced the retiring Larry Merlo as CVS CEO on Feb. 1.

Giacobbe observed that CVS's "commentary around utilization assumptions for the year also raised questions/concerns, as management noted that it was not projecting high levels of pent-up demand given system capacity constraints."

Lynch said during earnings call that in the fourth quarter the company saw utilization of total health care services "return to more near-normal seasonal levels as higher COVID-related costs were partially offset by somewhat lower levels of traditional services."

CVS said total medical membership in its Health Care Benefits segment rose by about 140,000 from the third to fourth quarters, reaching 23.4 million. That largely reflected enrollment increases in its Medicaid and Medicare plans, but those gains were partially offset by a 35,000 decline in commercial enrollment.

From Health Plan Weekly