CVS Health (CVS) Remains A Money Printing Machine

CVS Health reported its Q3 results today. Revenues for the period increased 10.6% over the prior year and reached $89.76 billion, which was $1.48 billion higher than the $88.29 million consensus estimate. This is because the company continues to enjoy solid growth in all its segments. Health Care Benefits was the segment that saw the highest growth, with revenues rising 16.9% to $26.30 Billion. CVS’s Health Services and Pharmacy & Consumer Wellness segments also continued to perform well with revenues in the former up 8.4% to $46.89 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 and Signify Health, and the latter enjoying a 6.0% top-line lift to $28.87 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 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. That’s why even with the increase in interest expense that resulted from the greater debt balance following the acquisitions and a higher effective tax rate weighing it down, adjusted earnings still rose by 1.8% to $2.21 per share, which was better than the 1.8% drop to $2.13 analysts had been projecting as well.

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CVS reiterated its adjusted 2023 earnings guidance range of $8.50-8.70/share. This solid performance puts CVS on track for this. Although the midpoint suggests the company would earn only $1.98 per quarter versus the $2.05 that Wall Street expected, this still implies a growth in the bottom line of up to 5 percent for the year. While it expects the high level of utilization in its Medicare Advantage Business to continue and the previously reported loss of business by Centene

Blue Shield of California has now caused CVS to expect that adjusted earnings will trend towards the lower range of its previously announced preliminary guidance of $8.50-8.70. However, this still means the company can generate a similar cash flow amount to the impressive $12.5-23.5 billion they continue to believe their operations will produce in 2023. CVS will be in a great position to pay down its extra debt that was taken on earlier this year to fund SGFY’s and OSH’s purchase of more than $18 Billion.

I believe these are the reasons why after initially dipping as much as 6.6% to start the day, CVS’s shares steadily rebounded and recouped nearly all of this loss. Yet given how cheap they remain relative to even the slightly more tempered outlook for the year ahead, I think they’ll continue to recover.