Shares of CVS Health (CVS -5%) are taking a tumble today although the company topped analyst expectations in its Q4 report. The drug store giant tends to provide guidance updates for its current fiscal year and the following fiscal year after its Q3 earnings report, so many of the primary metrics posted in Q4 were expected. This cycle, a month after issuing FY21 guidance in early November, CVS raised its FY21 guidance while giving investors FY22 EPS predictions for the first time. Then, in early January, CVS again raised its FY21 earnings guidance while reaffirming FY22 guidance.
As a result, CVS beating the high-end of its Q4 adjusted EPS forecast by $0.03 and delivering 2.4% higher revenues than the company anticipated while also reaffirming its FY22 guidance once again is not wowing investors.
Instead, investors may be focused on other weak points from Q4, such as CVS trimming the low-end of its FY22 cash flow from operations guidance by $500 mln. Also, after topping expectations in Q4, FY22's earnings guidance of $8.10-8.30 now translates to a slightly wider yr/yr decline of (4)-(1)%, rather than the (3)-(1)% projection based on January's updated guidance, so perhaps investors wanted to see CVS raise its FY22 guidance given Q4's ultimate results. Finally, CVS expects COVID-related sales, which contributed around 30% of total sales in FY21, to decline sharply in 2022. More specifically, CVS predicts a vaccine volume decline of 70-80% yr/yr, an in-store testing volumes decline of 40-50%, and only modest volume growth for OTC testing kits.
Nonetheless, CVS's Q4 earnings should not be easily brushed to the side.
- For starters, Pharmacy Services came in strong in Q4, growing 8.2% yr/yr to $39.3 bln. Perhaps more notably, CVS expects similar Pharmacy Services sales growth in FY22, guiding to growth of +6-8% yr/yr.
- Retail and Long-Term Care sales were similarly strong in Q4, climbing 12.7% yr/yr to $27.1 bln. However, most of the sales growth can be attributed to COVID-19 vaccine administration and testing kit demand. As a result, CVS is not expecting the same level of growth in FY22, but it still guided retail sales to a respectable +8.8-10.8%.
- Lastly, as CVS outlined during Investor Day in December, expanding its current primary care services is a focal point going forward. The announcement was well-received, as Walgreens Boots Alliance (WBA) is also aggressively stepping up its foray into the primary care space. Although CVS did not dive into this venture much during its Q4 earnings call, it did state that coverage is its main focus. Currently, CVS covers slightly under half the US population with its HealthHub and MinuteClinics locations.
Overall, despite the solid numbers put up by CVS in Q4, investors appear to be focusing more on the anticipated deceleration in COVID-related sales in FY22. However, we do not think Q4's outperformance should be so quickly overlooked. CVS has mightily outpaced rivals WBA and Rite Aid (RAD) over the past five years. Accordingly, CVS shares jumped over 50% in that span (including dividends) while WBA fell around 30% (including dividend payments) and RAD dropped by over 90%. Therefore, even though CVS's forward P/E ratio of 13x trades at a slight premium to WBA at 10x, we remain bullish on CVS for long-term investors, especially as it expands its primary care network.
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