Don’t be fooled by a sour reaction from Wall Street. Second-quarter results from CVS Health show the pharmacy and insurance giant has excellent vital signs.
Second-quarter sales of $72.6 billion and adjusted earnings of $2.42 a share both easily topped analyst expectations. CVS also upped its 2021 profit forecast for the second time this year.
Yet the stock fell sharply before recovering in early trading.
One reason for Wall Street’s skittishness: A rush of Covid-19 vaccinations helps explain the strong quarter. CVS administered about 17 million shots during the quarter—a pace that is bound to slow over the rest of the year. That resulted in extra customer visits and extra revenue. Comparable sales at the pharmacy counter and at the front of the store each rose about 12% from a year earlier.
Those growth rates will slow in the near term, but other, larger parts of the business are set to thrive in the longer term. For instance, the $70 billion acquisition of health insurer Aetna back in 2018 looks like a winner. Insurance revenue rose 11% from a year earlier and, while the segment’s operating income fell from pandemic-inflated levels, it was up 12% from the second quarter of 2019 even as demand for healthcare returned to normal levels.
Despite Wednesday’s selloff, the stock has rallied about 20% so far this year and is set up for further success. Shares trade at less than 11 times this year’s adjusted earnings forecast, a valuation in line with historical norms.
Some patience is required because the Aetna deal, now nearing its three-year anniversary, has left CVS with nearly $60 billion in long-term debt. That certainly limits financial flexibility in the short term: 93% of the $5.8 billion CVS has generated in operating cash flow so far this year has gone toward debt reduction. It is making progress, though: The company has paid down more than $17 billion in debt since the transaction closed.
Once bondholders have been satisfied, shareholders are set to be rewarded. For investors, owning this stock should help prevent elevated blood pressure.
Write to Charley Grant at [email protected]
Copyright ©2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
Appeared in the August 5, 2021, print edition as ‘CVS Stock Will Be Fine After Covid.’