CVS Health (CVS) reported Q2 results this morning. Specifically, revenues for the period grew 10.3% from the prior year to $88.9 billion and came in over $2 billion above the $86.53 billion consensus estimate as the company continued to benefit from solid growth across all of its segments. This was led by its Health Care Benefits segment where solid demand for all of its products drove a 17.6% rise in revenues to $26.75 billion. CVS’s Health Services and Pharmacy & Consumer Wellness segments also continued to perform well with revenues in the former up 7.6% to $46.22 billion on a favorable pharmacy drug mix, growth in its specialty pharmacy business, brand inflation and contributions from its recent acquisitions of Oak Street Health (OSH) and Signify Health (SGFY), and the latter enjoying the same 7.6% top-line lift to $28.78 billion thanks to greater prescription volumes, a favorable pharmacy drug mix and brand inflation.
The higher revenues and better purchasing economics in Health Services helped limit the pressure put on profit margins from lower pharmacy reimbursements and the anticipated decline in COVID-19 vaccinations and diagnostic testing in Pharmacy & Consumer Wellness, as well as increased outpatient utilization in Medicare Advantage when compared with pandemic-reduced utilization levels in the prior year. As a result, adjusted earnings fell by only 12.6% to $2.21 per share, which was better than the 16.6% drop to $2.11 analysts had been projecting as well.
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This solid operating performance also keeps CVS well on track to achieve its 2023 adjusted earnings guidance of $8.50-8.70 per share, which it reiterated. While the midpoint of this implies the company will earn just $4.19 per share over the remainder of the year versus the $4.28 the Street was looking for, it still suggests a return to bottom-line growth of about 3% in the second half. With this also continuing to have CVS believing that its operations can produce the impressive $12.5-13.5 billion in cash flow in 2023 it had previously guided to, the company remains in great position to quickly pay down the extra debt taken on to fund the more than $18 billion it spent on buying SGFY and OSH earlier this year. If so, I think the stock—which even after today’s gain continues to trade at just 9 times even the low end of its earnings outlook for the current year and at a sizable discount to the market’s current forward P/E ratio of more than 20—has plenty of room to run.
Julius Juenemann, CFA is the equity analyst and associate editor of the Forbes Special Situation Survey and Forbes Investor investment newsletters. CVS Health (CVS) is a current recommendation in the Forbes Investor. To access this and the other stocks being recommended through the Forbes Investor, click here to subscribe.
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