I had written Market Recon. I had fed the dog. I had made myself some eggs. I had gone for a short walk. I put on my radio. The morning meal break was over. CVS Health (CVS) is not my largest position but certainly that name was the largest position on my book that was set to report earnings on Wednesday morning. I had not liked the way the market received the numbers from Walgreens Boots Alliance (WBA) back in early April so I held my breath. There it was. It sounded as if CVS health had delivered. It sounded as if CEO Larry Merlo was getting the job done. Hmm. Time to pop the hood and take a look at what makes this engine hum. Let's go.
For the first quarter, CVS Health posted adjusted EPS of $1.91, which beat consensus by a country mile. The firm also printed revenue of $66.76 billion. Not only was that a beat, but also good for annual growth of 8.3%. Same store sales increased 9% for the quarter, while retail prescription volume increased 9.8%. There was what looks to me to be optimal performance well spread across the firm's business lines.
Peering into the revenue performance, we see the firm's largest unit, Pharmacy Services (pharmacy benefit management), grow 4.2% to $34.983 billion. However, the same unit was able to grow adjusted operating income by a whopping 24.7% to $1.181 billion. The firm's second largest driver of sales, Retail (includes filling prescriptions as well as sales of general merchandise) put a $22.749 billion print to the tape. This was good for 7.7% growth, and produced adjusted operating income that increased by 27.7% to $1.902 billion. Also important is the Health Care Benefits unit, that posted sales growth of 7.4% to land at $19.198 billion. That group did see a decline in operating income.
CVS Health states that the chain has kept its stores open as an 'essential' retailer through this pandemic. In addition to prescription meds, the firm sell over the counter type meds, as well as household goods and cleaning supplies. The firm notes that due to the impact of the crisis, that customers were more likely to order 90 day supplies of their prescriptions, and purchase larger volumes of household goods in the front of the store.
The firm has also opened drive-thru testing locations for this coronavirus in some of its parking lots and has made plain the effort to expand this to nearly 1,000 locations nationally by the end of May. The plan is to use the Abbott Labs (ABT) rapid testing device that allows for a result in minutes as long as there is ample supply.
Oh, one last thing. You may recall that back in March, as increased demand for the firm's goods and services had started to become apparent, CVS announced the intention to add 50,000 individuals to payroll. Not a lot of firms doing that in the spring of 2020.
I'll tell you what I see. I see an upward sloping Raff Regression Channel. I wanted to see a Pitchfork. I expected to see a Pitchfork. Just doesn't really fit. I don't really see that (blue) cup with handle as a factor, I drew it for you just to let you know that it's out there and could impact price just in case I am wrong about what I see. The pivot, should that pattern play out, would be just below the $65 level.
What I see is basically a rising trend with highs and lows roughly equally spaced around a central trend line. Now that these shares will flirt with retaking that central trend line this morning, my thought is that the $75 level is a very realistic price target prior to Q2 reporting season.
- Target Price: $75
- Add: $59
- Panic: $52