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Monday, November 28, 2022

CVS Is a Good Place to Hide in a Volatile Marketplace: What Traders Can Do

CVS Health (CVS) had something to do on Tuesday morning. The firm is planning to present at the JP Morgan Healthcare Conference this morning. Before doing so, however, CVS Health filed an 8K with the SEC announcing increased full year guidance for 2021.

Shareholders will recall that back on November 3rd, CVS posted adjusted Q3 EPS that beat Wall Street, on revenue that also beat Wall Street, and increased full year adjusted EPS guidance at that time from $7.70-$7.80 to $7.90-$8.00. The stock, which has rallied nicely of late, struggled for almost a month after that release. You see, while CVS had raised guidance for adjusted full year EPS, the firm had reduced guidance for full year GAAP EPS due to a rise in the medical benefit ratio (which is benefit costs as a percentage of premium revenues) to roughly 85.8% from about 84% for the comparable year prior period.

Two weeks after that, CVS unveiled their new retail strategy. Two weeks after that, the firm increased the dividend, and increased full year earnings and revenue guidance, while laying out guidance for 2022. A week after that, Bank of America selected CVS as its one stock in the healthcare sector with upside that had largely been largely neglected by active funds but could benefit from inflation.

This Morning

From the 8-K that was filed on Tuesday morning, CVS Health has increased full year 2021 adjusted EPS guidance to $8.33-$8.38 from $8.00+, and increased guidance for full year 2021 EPS guidance to $5.87-$5.92 from $5.50-$5.61. Wall Street had been looking for $8.03 for the adjusted number. The firm simultaneously reaffirmed guidance for FY 2022 GAAP EPS to $7.04-$7.24 and guidance for adjusted 2021 EPS of $8.10-$8.30. Wall Street is at $8.27 on this metric.

CVS will report early in February. For the fourth quarter, a consensus of 23 sell-side analysts covering the name is for adjusted EPS of $1.61 on revenue generation of about $75B. These numbers, if precise (they won’t be), would be good for earnings growth of 23.8% on revenue growth of almost 8%.

Focus will be on the Health Care Benefits segment where revenue grew 9.5% for the third quarter to $20.479B, but this is where the higher medical benefits ratio was felt. Pharmacy services remains the firm’s largest business. That unit experienced sales growth of 9.3% to $39.046B for the third quarter. Eyes will also be on the Retail Segment, which is currently undergoing an overhaul. This unit posted Q3 sales of $24.992B, which was good for growth of an even 10%.


Balance sheet? Not wonderful. If the current ratio, which as of the end of the third quarter, stood below “one” is your only metric. Current assets are outweighed by current liabilities despite a growing cash balance and a boost to receivables. Total assets still easily outweighs total liabilities less equity as the firm has worked toward reducing long-term debt while moving some of that debt into the current column. Free cash flow (levered or not) is still healthy. Still, tangible book value starts with a minus sign. We never love that.

My Thoughts

The shares seem cheap at 13 times forward looking earnings. They are cheap because the fundies could be better. That said, the firm certainly seems to have the wind at its sails right now, and I am long the name. Yes, I took profits a ways back, and missed some of the gravy. That said, with a beta of 0.57, CVS is a good place to hide in a volatile marketplace. In addition, the firm pays shareholders 2.1% or $2.20 per year just to hang around.

The Chart

By every indicator I follow regularly, CVS was coming out of a technically overbought condition on Monday, ahead of raising guidance. Readers will see that from May through early November, CVS built a saucer (because it’s’ too shallow to be a cup), and then tacked on a handle. The shares are currently working on a breakout provided by a $97 pivot. So if not in the name, you did miss some. I currently have a $116 target price, so it’s not time to sell the name (assuming I am right).

A trader with the name could sell February 11th CVS $116 calls against the position for an implied value of about $0.51. A trader interested in getting long the shares without putting up the cash necessary for an equity purchase could sell $101 February 11th puts for about $1.55. The 21 day EMA currently stands at $101, and if the trader were to be tagged with the shares at expiration, that trader’s net basis would be $99.45.

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