CVS Health's (CVS) earnings release has the market taking an apprehensive look at 2019 guidance.
The company released mixed results for its December-ended quarter before the market open, reporting adjusted earnings per share of $2.14 per share, up 11.5% from the same period last year and firmly ahead of the Street consensus of $2.05 per share, but revenues came in just under the consensus bar at $54.424 billion against an expectation of $54.58 billion.
The key to the stock today, however, is the tepid guidance that set the company for deceleration in 2019.
The health care leader set the guide for earnings per share at $6.68 to $6.88 on an adjusted basis, well below the Refinitiv forecast of $7.41 per share and the 2018 results that came in at $7.08 per share.
Shares of the Woonsocket, RI-based retail and health care company were marked sharply downward after the guidance report, quickly falling about 7% in the lead up to its 8:30 a.m. conference call.
A key drag that appears in the report is the long-term care business that is a cause for caution from executives as it outpaces relatively strong retail sales expectations.
"LTC management submitted an updated final budget for 2019 which showed significant additional deterioration in the reporting unit's projected financial results for 2019 compared to the analysis performed in the second quarter of 2018, primarily due to continued industry and operational challenges, which also caused management to make further updates to their long term forecast beyond 2019," the company reported.
The statement added that the company took goodwill impairment charges of $2.2 billion and $6.1 billion related to this segment, which was reflected in fourth quarter results.
"The results of the impairment test showed that the fair value of the LTC business was lower than the carrying value resulting in a $2.2 billion goodwill impairment charge," the company's report reveals. "In addition to the lower financial projections, lower market multiples of the peer group companies contributed to the amount of the goodwill impairment charge."
The company will also need to integrate its blockbuster $70 billion acquisition of Aetna after acquiring the insurance giant in the fourth quarter of 2018.
"2019 will be a year of transition as we integrate Aetna and focus on key pillars of our growth strategy," CEO Larry Merlo said. "We are fully aware of the need to address the impact of certain headwinds that are having a disproportionate impact in 2019 compared to prior years, and importantly, we are taking comprehensive actions to move past them. We understand acutely the importance of balancing near-term execution with longer-term vision, and we are confident that our actions will position us well in 2020 and beyond."
The "transition year" comments likely do little to entice buyers into the stock.
It is worth noting that the benefit manager will do without retail giant Walmart (WMT) for the year as well, due to pricing disputes, possibly contributing to the lower guidance for the year.
"At a time when everyone is working hard to find ways to reduce health care costs, Walmart's requested rates would ultimately result in higher costs for our clients and consumers," said Derica Rice, President, CVS Caremark, the pharmacy benefit management business of CVS Health in January. "While we have enjoyed a long relationship with Walmart as a low-cost provider in our broad national networks, based on our commitment to helping our clients and consumers manage rising pharmacy costs, we simply could not agree to their recent demands for an increase in reimbursement."
Additional comments on the headwinds confronting the company for the "transition" year as a pre-market selloff ensues are expected from executives during an 8:30 a.m. earnings conference call.