Back in May of 2021, CVS Health (CVS) launched the firm's clinical trial services business that was aimed at leveraging a collaborative effort with "big pharma" to support testing for experimental Covid-19 vaccines and therapeutics during the pandemic and beyond.
Over the weekend, Endpoint News reported that the firm would shut down this unit in order to focus upon its core businesses. CVS Health confirmed the story, stating, "We're winding down our Clinical Trial Services business in a phased way with a full exit expected by December 2024."
The pre-opening knee-jerk was higher for the stock, which has since come down some. The stock is down just under 25% since its December high. This particular move is probably the right decision. More importantly, investors are probably asking..."Is it yet time to get back into CVS?"
Two Weeks Ago
Actually it will be two weeks tomorrow. CVS Health posted first quarter earnings. For the period, CVS earned an adjusted $2.20 per share (GAAP EPS: $1.65) on revenue of $85.278B. These numbers beat Wall Street's expectations for both top and bottom line performance. Revenue growth was solid at +11% y/y. Yet, the stock reacted negatively.
Guidance for the full year was revised lower, and thus... fell short of Wall Street's expectations. For the full year, CVS sees GAAP EPS in a range spanning from $6.90 to $7.12, and adjusted EPS of $8.50 to $8.70. These new projections were down from $7.73 to $7.93 and $8.70 to $8.90, respectively. Confirmed operating cash flow is now seen for the full year in between $12.5B and $13.5B. The reduced guidance incorporated acquisition related costs that were not included in the previously given outlook.
Fundamentally
For the quarter reported two weeks ago, CVS generated operating cash flow of $7.438B. This took operating cash flow for the 12 trailing months to $20.052B. If one wants to use only whole calendar years, CVS posted operating cash flow of $16.177B for the full year ended this past December. What that tells me is that the guidance for operating cash flow for this full year is indeed rather light. In fact, calendar year 2018 was the last year that CVS posted an operating income with a $12B handle.
Going back to the quarter, CapEx came to $984M, which was not out of line for CVS. This left the firm with free cash flow of $6.454B. Out of this total, the firm repurchased $2.052B in common stock and paid $779M out in dividends to shareholders. So, on the plus side, even if reduced, the firm is a free cash flow beast and they have been responsible with that free cash.
CVS ended the quarter with a cash position of $17.72B, inventories of $18.263B and current assets of $68.706B. Current liabilities add up to $75.054B, primarily comprised of 'accrued expenses" and "other current liabilities." This leaves CVS with a current ratio of 0.92, which does not pass muster in my book. The firm's quick ratio runs at 0.67, which is nothing to boast of.
Total assets amount to $239.33B, including $110.425B in goodwill and other intangibles. At 46% of total assets, that is a bit much for me. Total liabilities less equity comes to $167.75B, which includes gargantuan long-term debt of $56.45B.
Obviously, this is a tough balance sheet to look at. What free cash flow flexibility there is should be put toward either paying down debt or leveling the balance between cash and debt depending on debt servicing expenses. Either way, repurchasing common stock should probably not be prioritized at this time.
My Thoughts
CVS trades at less than eight times forward looking earnings. For a reason. The fundamentals explained above are not in tip-top shape. Now, investors have reduced guidance to deal with. For the current quarter that includes June, Wall Street is looking for an adjusted EPS of $2.15 versus $2.40 for the year ago comparison on roughly $85.8B. That would be good for year over year growth of 6.4%. Hence... we expect margin compression.
Readers will see a nearly perfect downward sloping channel that has been in place since early December. Now, look within...
There also seems to be a short-term "falling wedge" pattern under development within our longer-term price channel. Falling wedges tend to produce a violent move upon closing and are often considered to be patterns of bullish reversal. The conditions are ripe for a technical reversal even if short-term.
Idea
There is a chance that CVS can be bought close to the $65/$66 area. An investor/trader interested in doing so (maybe for the 3.5% dividend yield) should consider selling June 16 $65 puts for a rough $0.75 as a means of getting into the equity, and then turning round and purchasing $60 puts expiring on July 21 for about $0.25 for protection's sake, just in case the channel overpowers that wedge.
Once in the equity, the same trader could then look for longer dated (covered) calls to sell, further reducing net basis. I see the January $75 calls trading close to $4 this morning.
