Buy Into the Strength of CVS As the Vaccines Roll Out

Shares of CVS (NYSE: CVS) stock are sharply down in early trading after the pharmacy chain released its fourth-quarter earnings. The nation’s largest pharmacy health care provider posted earnings per share (EPS) of $1.30, beating analysts’ estimates by six cents. Revenue came in at $69.28 which was a 4% year-over-year (YOY) gain.

Lynch advised for 2021 adjusted earnings to come in between $7.39 and $7.55 per share. Some analysts are forecasting at the high end of that range.

So why are the shares falling? It seems like a case of investors expecting more from the pharmacy chain. And this was the first earnings call with the company’s new CEO Karen Lynch.

CVS stock was up nearly 6% for the year prior to the earnings report. But it was off of its 52-week high set in early January, and was up less than 1% in the last 12 months.

Covid-19 Was Not a Huge Revenue Boost

CVS is one of many pharmacy chains that are receiving doses of the Covid-19 vaccine. The pharmacy chain is delivering the vaccines in its pharmacies by appointment.

However, CVS is also playing a key role in ensuring the vaccine is distributed in long-term care facilities. This is a key strategic initiative to beating the pandemic. To that end, the company said it has administered over 3 million vaccines in approximately 40,000 long-term care facilities, although the company acknowledged this had little bearing on overall results.

And the brick-and-mortar locations continue to serve as Covid-19 testing sites. The company says it has administered 15 million coronavirus tests to date.

In the earnings report, the company says it projects approximately $400,000 to $500,000 in 2021 revenue to come from Covid-19 related activities.

Focus on Wellness

That means there has to be another catalyst. And, according to the company’s new CEO Karen Lynch, that appears to be retail sales. In the fourth quarter, CVS saw retail sales increase by 7% from the same quarter in 2019. Lynch expressed confidence for similar gains in 2021.

Based on the reaction of investors they are skeptical that this will happen.  The growth of e-commerce has affected pharmacy chains due to a decline in front-of-the-store sales. That was amplified by the pandemic as people were afraid to leave their home, particularly those in the most vulnerable population that make up a good percentage of the company’s customer base.

But if the company is successful at bringing individuals into its stores to get the vaccine, it gives them an opportunity to stay top of mind. This is important because the entire industry is mindful of the potential threat posed by Amazon NASDAQ: AMZN. However, through 2019, CVS led the industry in market share which gives it a little bit of breathing room to expand its other services.

And right now, the stores acknowledge that growth needs to come from giving pharmacy customers a compelling reason to come in the store. For CVS, that reason appears to be on wellness.

According to Lynch, the company’s goal “is to make health care more accessible, more affordable and simpler.” The practical response from CVS came shortly before the pandemic when it began opening HealthHUB stores.

The HealthHUB is a store-in-store concept. Except in this case, the other store is manned by medical professionals who give the company the ability to offer expanded health care services and offerings. The pandemic slowed this expansion. However, the company plans to expand this concept to 1,500 locations by the end of this year.

Analysts like CVS Stock

One reason the bulls can cheer is that analysts like the stock. Of 15 analysts that are offering opinions, the company has 12 buy ratings and 3 hold ratings. Plus, the consensus 12-month price target stands at $82.08 which would be a gain of over 13% from its present level.

Buy CVS On its Underlying Strength

CVS is not a vaccine play. The company should be applauded for doing its part, but the numbers don’t suggest this will have a large effect on its bottom line. Where the company has a chance to shine is in its role as a bridge between a primary care physician and the patient.

Admittedly, investors may be waiting for CVS to prove it, but with a price target that suggests a 13% upside, CVS stock looks like a winner as traffic should continue to return to normal levels.