Is it time... to get back into CVS Health (CVS) ? The stock closed on Tuesday afternoon down 18% in less than two months, while the equity markets in general, have gone the other way. Before making this decision, there is a lot of wood to cut. CVS Health is in the news on Wednesday morning. In fact, the company is all over the news.
First up, the seemingly months of speculation are over. CVS Health has announced that the firm will acquire Oak Street Health (OSH) for $39 per share, or about $10.6B. This will be an all-cash deal that is expected to close in 2023, subject to the approval of OSH shareholders. Oak Street CEO Mike Pykosz will stay on the job until the transaction is final.
Oak Street operates about 169 health care centers across 21 states in the US and attended to a rough 210K patients over the three month period ended last September. Oak employs 600 or so primary care providers. CVS believes that by 2026, Oak Street will be running over 300 centers and that each center will have the potential to contribute $7M of Oak adjusted EBITDA when at maturity. That would be more than $2B in aggregate.
CVS also projects more than $500M in synergies savings potential over time. The all-cash deal will be funded through available resources and existing financing capacity. The firm is committed to maintaining its current credit rating.
Earnings
On Wednesday morning, CVS Health released the firm's fourth quarter financial results. For the three month period ended December 31st, CVS posted an adjusted EPS of $1.99 (GAAP EPS: $1.75) on revenue of $83.846B. The top line number decisively beat Wall Street with a print that was good for year over year growth of 9.4%.
The bottom line numbers also beat Wall Street, while the adjusted number improved by one penny compared to the year ago period and the GAAP print improved dramatically. The lion's share of the adjustment made for the quarter reported was for the amortization of intangible assets, while for the year ago period, the firm took an impairment amounting to $1.02 per share related to the stores that just is not there this time around.
Segment Performance
- Health Care Benefits (Offers a range of insured and self insured medical, pharmacy, dental, and behavioral health products and services.) generated revenue of $23.033B (+11.3%), producing adjusted operating income of $858M (+68.2%). Total medical membership increased to roughly 24.4M (+109K over three months, +548K over 12 months).
- Pharmacy Services (Provides a range of pharmacy benefit management solutions to employers, health plans, government employee groups, and government sponsored programs.) generated revenue of $43.747B (+11.2%), producing adjusted operating income of $1.988B (+9%). Total pharmacy claims processed increased to $600.4M (+3.1%).
- Retail/LTC (Fulfills prescriptions for medications, provides patient care programs, walk-in clinics, vaccine administration and diagnostic testing, while also selling a wide array of health and wellness products as well as general merchandise.) generated revenue of $28.184B (+4%), producing adjusted operating income of $1.84B (-25.1%). The drop in operating income for this segment was largely due to decreased demand for Covid vaccination and diagnostic testing.
Guidance
For the full year, CVS Health sees GAAP EPS in a range spanning from $7.73 to $7.93. Full year adjusted EPS is expected to land in between $8.70 and $8.90. This does drag the midpoint of expectations below the consensus view of $8.86. CVS also sees full year adjusted cash flow from operations at $12.5B to $13.5B.
Fundies
For the full year 2022, cash flow from operating activities printed at $16.177B, which was down from $18.255B in 2021. Readers can now see that the above guidance for adjusted cash flow is less than impressive. The firm ended the quarter with a net cash position of $15.723B and inventories of $19.09B on the balance sheet.
Both were up moderately over 12 months. This took current assets up to $65.682B. Current liabilities added up to $69.736, leaving the firm with a current ratio of 0.94, which is really a touch lower than we like to see. Sans those inventories, the firm's quick ratio works out to 0.67. That too, is sub-optimal.
Total assets amount to $228.275B, including $102.904B in "goodwill" and other intangibles. At 45% of total assets, I do find that a little bit on the high side. Total liabilities less equity comes to $156.96B. This includes long-term debt of $50.476B that combined with debt labeled as current, brings the debt-load to $52.254B.
As readers could tell, I was trying really hard to like CVS today as that name has done well for me in the past, but I do not love this balance sheet. I don't like the current ratio and I don't like the imbalance between cash on hand and total debt.
This is not an immediate problem, but I can see why the firm is concerned about the acquisition of Oak Street potentially impacting its credit rating if not paid for in cash. Given the operating cash flow, which though in decline is still quite robust, the firm should be able to protect the dividend.
My Thoughts
Readers can see that the shares of CVS have now been in a descending channel for more than a year. Ever so slowly, each high has been lower than the one prior and each low has been lower than the one prior. The channel, however, is about $20 across, so money can certainly be made trading the range regardless of the trajectory of said range.
The stock trades at 10 times next year's earnings, which is not inexpensive. That's the price of having to work within a sloppy looking balance sheet. That said, CVS does pay shareholders $2.42 per year to stick around for a yield of 2.81%. That is attractive.
I could see initiating CVS on a hold of that 21-day EMA (exponential moving average) ($88). The stock does not seem to respect neither its 200-day SMA (simple moving average) nor its 50-day SMA, so that's the line to watch as clearly that line had been resistance since early December.
My thinking is that unless this one is in the portfolio as an income stock that it's a trade, and that trade would have a target of about $102, which is where the upper trendline will come into play.
