Shares of CVS Health (CVS) are sliding after the company reported mixed fourth quarter results, with lower than expected guidance amid its integration of Aetna and uncertainty around rebates. Additionally, the healthcare company also reported a $2.2B charge related to its long-term care facilities business. Following the news, Wells Fargo analyst Peter Costa downgraded the stock to Market Perform, citing CVS' "continued failure" to stabilize the company's existing businesses.
MIXED RESULTS, WEAKER GUIDANCE: On Wednesday, CVS reported fourth quarter adjusted earnings per share of $2.14 and revenue $54.4B, with consensus at $2.05 and $54.58B, respectively. For the first quarter, the company forecast adjusted EPS between $1.49-$1.53, below the expected $1.67, consolidated revenue of $59.61B-$60.53B, compared to the $59.79B consensus, and adjusted operating income between $3.39B-$3.45B. For fiscal year 2019, CVS sees adjusted EPS between $6.68-$6.88, which is below consensus estimates of $7.41, and consolidated revenue of $249.86B-$254.29B, compared to the $247.61B consensus.
President and CEO Larry Merlo stated that "2019 will be a year of transition as we integrate Aetna and focus on key pillars of our growth strategy. We are fully aware of the need to address the impact of certain headwinds that are having a disproportionate impact in 2019 compared to prior years, and importantly, we are taking comprehensive actions to move past them. We understand acutely the importance of balancing near-term execution with longer-term vision, and we are confident that our actions will position us well in 2020 and beyond." Further, the company also sees "challenges -- structural and CVS-specific in long-term care space, lower brand inflation, questions about rebates, ongoing pharmacy reimbursement pressures -- [as] having disproportionate impact vs. prior years." Additionally, CVS reported a $2.2B goodwill impairment charge related to Long-Term Care. "The LTC business has continued to experience industry wide challenges that have impacted our ability to grow the business at the rate that was originally estimated when the company acquired Omnicare, Inc. in 2015. […] During the fourth quarter of 2018, the LTC reporting unit missed its forecast primarily due to operational issues and customer liquidity issues, including one significant customer bankruptcy. Additionally, LTC management submitted an updated final budget for 2019 which showed significant additional deterioration in the reporting unit's projected financial results for 2019 compared to the analysis performed in the second quarter of 2018, primarily due to continued industry and operational challenges, which also caused management to make further updates to their long-term forecast beyond 2019," the company added.
MOVING TO THE SIDELINES: Citing CVS' "continued failure to stabilize its existing businesses," particularly the long-term care business, Wells Fargo's Costa downgraded the stock to Market Perform from Outperform. The analyst noted that CVS has “failed to improve operations” after two years of pressure and continues to struggle with its Omnicare LTC acquisition, setting up 2019 as a weaker than expected year. Beyond the "obvious need" to integrate the Aetna acquisition, CVS expects the ongoing business pressures to have an outsized impact on 2019, making it a transition year, the analyst contended. Costa also noted that the company reported "disappointing" 2019 adjusted earnings per share guidance, and lowered his price target on the shares to $68 from $104.
WHAT'S NOTABLE: Earlier this month, Morgan Stanley analyst Ricky Goldwasser put 60% odds on CVS' initial FY19 EPS guidance of $7.00-$7.30. While such an outlook would be below the consensus of $7.44, the analyst noted that bears were concerned guidance could be below $7 and such an outlook would be seen as "good enough" to drive the stock up 4%-9%. However, Goldwasser pointed out that the stock could be down 11% if initial 2019 earnings per share guidance came in below $7. He reiterated an Overweight rating on the shares.
PRICE ACTION: In morning trading, shares of CVS have dropped 7.7% to $64.49. Also lower are Rite Aid (RAD), Cigna (CI) and UnitedHealth (UNH).
