Readers know that I am a fan of CVS Health (CVS) CEO Karen Lynch. Readers know that this faith in Lynch and CVS Health has been good to me, especially as equity markets struggled through January. This (Wednesday) morning, there is going to be some profit taking. This is that story.
For the firm's fourth quarter, CVS posted adjusted EPS of $1.98 (+52.3% y/y) on revenue of $76.6B (+10.1% y/y), beating expectations on both the top and bottom lines. GAAP EPS from operations printed at $0.98 (+30.7% y/y). There's a lot of one-timers in the data, as you have probably figured. Operating income actually decreased 11%, thanks to a $1.4B store closing impairment charge as well as a $431 goodwill impairment charge associated with the long-term care business in the Retail/LTC segment. On the other side of the coin, CVS realized gains of $126M and $263M from antitrust legal settlements recorded during the final three months of the year.
Segment Performance
- Pharmacy Services
Total revenue increased 8.2% to $39.341B, producing adjusted operating revenue of $1.824B, which was up 16.8%. Total pharmacy claims processed increased 8.2%. Excluding the impact of Covid-19 vaccinations, claims processed increased 5.4%
- Retail/LTC
Total revenue increased 12.7% to $27.111B, producing adjusted operating income of $2.457B, which was up 38.4%. Covid vaccinations and Covid test kits contributed about 40% of the increase in revenue for the segment.
- Health Care Benefits
Total revenue increased 8.4% to $20.699B, producing adjusted operating income of just $510M, which was up from $153M in Q4 2020. Medical membership increased by 151K over the three month period, ending the quarter/year at 23.8M.
Balance Sheet
Okay, the balance sheet, which has been a sore spot at least since the Aetna acquisition, is a work in progress, and Lynch (who was not CEO at the time) is working on it. The firm's net cash position increased from $10.8B to about $12.5B over the past 12 months, while there has been a real effort made to pay down debt. Long-term debt is down to $51.9B from $59.2B 12 months ago. $4.2B of that debt is considered current, as are $1.6B of the firm's $18.1B in long-term lease liabilities. This will obviously leave a mark on the firm's current ratio.
Current assets have increased to $60B from $56.3B, while current liabilities have expanded from $62B to $67.8B. This is primarily a battle between accounts receivable and accounts payable plus accrued expenses. It leaves the firm with a current ratio of 0.88, which you know bothers me. Fortunately, total assets total $233B, while total liabilities less equity equals $157.6B. That seems pretty darned decent, until you realize that $79.1B worth of those total assets are labeled as "goodwill", which is not an increase from the quarter prior or any recent quarter/year. The deal here is that total assets less goodwill do not outweigh total liabilities less equity.
Have I sufficiently gotten the point across that even though I am long the stock and I do like the current CEO, I am uncomfortable with the balance sheet?
Guidance
The firm confirmed full year 2022 adjusted EPS guidance of $8.10 to $8.30. Wall Street had been up around $8.27 on this metric. That being above the firm's midpoint, this can have the effect of the firm having reduced guidance on the stock. The firm sees GAAP EPS from operations at $7.04 to $7.24. The firm did revise the low end of its expected full year cash flow from operations. The firm sees FY 2022 cash flow from operations at $12B to $13B, down from $12.5B to $13B. I do not see any significant changes being made this morning by the community of sell-side analysts.
Karen Lynch
The CEO made comment in this morning's press release... "We're engaging millions of customers across our business and in our community health destinations, becoming an even bigger part of their everyday health. That's clearly reflected in our performance, but more importantly in our potential."
My Thoughts
Readers will see that our old cup (or was it a saucer?) with handle pattern that provided the breakout past the $97 pivot worked like a charm. Going into the numbers, I had a $116 price target. What now? Well, if the shares can hold their 21 day EMA ($106.29), I don't think I'll do anything as nothing will have been broken.
While Relative Strength is nicely neutral, both the daily MACD and Full Stochastics Oscillator seem a bit extended. A little bloodletting this morning could actually be healthy if my three main indicators start singing in unison again.
This is my new plan. If the 21 day cracks, I am willing to add as close to the 50 day SMA ($101.79) as I can. That line cracks though, and I will show no mercy. $101 is my new panic point.
