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From my perspective, CVS Health (NYSE: CVS) is doing everything right.
The company is making smart deals, establishing an increasingly dominant retail health brand and setting itself up for a promising future.
Just this week we saw the second-quarter CVS earnings report, which I thought included solid results. The market reaction to the report was lackluster, with the stock down nearly 5% soon after it opened for trading on Tuesday. It ended the day down 2.4%.
Frankly, I’m not too sure what was so disappointing to the market.
Guidance Change?
On the one hand, the company did technically lower its full-year earnings guidance. In the commentary that accompanied the earnings announcement the company adjusted its full-year EPS guidance from a range of $5.08 to $5.19 per share to a new EPS guidance range of $5.11 to $5.18.
Sure, the company did technically lower the top-end of its guidance range from $5.19 to $5.18 per share. But, more importantly to me, it also raised its low-end from $5.08 to $5.11 per share.
Even then, we’re still only talking about 2015.
If you own CVS Health stock because you’re expecting the company to wow investors in 2015 I think your investment thesis is a bit misguided.
Look to the Long Term
Owning CVS Health today is about getting in now before the company really starts to reap the rewards of its recent acquisitions. It’s about getting in now and benefiting from the dividend growth that the company’s new-and-improved cash-generating machine will almost surely drive.
Consider that even if CVS Health’s full year earnings per share comes in at the low end of its new range – $5.11 per share – it would be a huge increase over its 2014 EPS of $3.96. In fact, CVS only grew its EPS by 5.3% between 2013 and 2014.
Achieving EPS of $5.11 per share in 2015 would mean an increase of 30% from 2014 to 2015.
Not only do we see double-digit EPS growth in the current environment, we’re also seeing huge demographic trends that should further propel the companies businesses and, in turn, drive the stock higher.
As to the CVS earnings report, the company is well on its way to achieving its 2015 EPS and revenue goals.
CVS Health reported adjusted EPS – including a one-time charge of 3 cents share related to financing of its recent acquisitions – of $1.19 per share compared to analyst expectations that it would report $1.20 per share. Meanwhile, the company reported $37.17 billion in revenue compared to the $37.18 billion it was expected to report.
Opportunity to Buy
CVS Health’s stock has now pulled back more than 5% from its 52-week high despite the fact that the company’s financials remain on track
I also expect a dividend increase from CVS later this year and it seems highly unlikely that the market has fully appreciated the impact of its deal with Target (NYSE: TGT). CVS is buying 1,660 Target pharmacies that will be rebranded as CVS Health pharmacies, 80 in-store clinics that will be rebranded as MinuteClinics, and adding both of their customers to CVS’s lucrative Caremark pharmacy benefits-management division.
For the market to react negatively to the company more-or-less meeting its high expectations seems unfair to me and has created another buying opportunity for investors.
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