CVS Health (CVS) Is Looking Lively After Posting Solid Beat-And-Raise Report
3:47 pm Wednesday, August 03rd, 2022
Sales from COVID-19 vaccinations and over-the-counter test kits may have slowed sharply in Q2, but CVS Health (CVS) still posted a solid beat-and-raise quarterly report, highlighting the diversification of its business model. Each of the company’s core businesses generated healthy revenue growth, with the Pharmacy Services segment leading the way with a 12% increase. CVS’s upside results are also a continuation of its outperformance versus rival Walgreens Boots Alliance (WBA), which has struggled under the weight of its AllianceRX investment. On a year-to-date basis, shares of CVS are about flat, while WBA has slid lower by around 25%.
Key components of CVS’s strategy include expanding its all-payer primary care capabilities and optimizing its retail footprint. On the latter point, the company is aiming to close 900 underperforming locations by the end of 2024. These initiatives, combined with the retention of foot traffic gains made during the pandemic, are helping to drive CVS’s impressive string of EPS beats, which now spans over five years.
Beyond this quarter’s EPS beat, a few other items stand out from the earnings report.
While the Retail/LTC segment generated the slowest growth in Q2, at +6.3%, we view the results favorably since it lapped strong growth of 14.2% in the year-earlier period. On a same-store sales basis, sales were up by 8%, on top of last year’s 12.3% increase, to easily surpass expectations.
membership continues to expand, increasing by 922,000 members for a total of 24.4 mln.
The business was also more profitable in Q2 as membership benefit costs as a percentage of premium revenues dropped to 82.9% from 84.1% a year ago. As a result, operating income jumped by 38% to $1.75 bln.
With the company firing on all cylinders, it lifted its FY22 EPS guidance to $8.40-$8.60 from $8.20-$8.40. The amount of the increase is roughly in line with the amount of upside from Q2, but CVS has a track record of gradually boosting its outlook, and then exceeding it.
The main takeaway is that CVS continues to execute very well in a challenging business climate. COVID-related tailwinds may be abating, but the company’s outperformance during the pandemic is providing it with a lasting edge over its main competitors WBA and Rite Aid (RAD).
