It’s Almost Time To Buy CVS Health Corporation (NYSE:CVS)

There’s Little Not To Like About CVS Health Corporation

Shares of CVS Health Corporation (NYSE:CVS) have been struggling to maintain their value over the past few years but that is about to change. The merger with Aetna is well-completed at this point in the game and the outlook for earnings is getting brighter by the day. The company’s calendar 3rd quarter report is not without its issues but the overall theme is good. The company is beating on all metrics, poised to grow along with the economic rebound, and has a healthy balance sheet. The only worry for investors now is the new CEO. Incumbent Larry Merlo is slated to retire on the first of February. His replacement is long-time Aetna-segment exec Karen Lynch so the handover should go smoothly.

CVS Earnings Fall But Beats On All Other Metrics

CVS Health reported a great quarter that was marred by one thing. Despite a 3.5% increase in YOY revenue, the earnings fell by double-digit margins on both a GAAP and the adjusted level. The good news is that both revenue and earnings beat their consensus targets, and both include extensive investment in the future of the company. The top-line revenue came in at $67.1 billion or 0.8% better than expected while GAAP earnings of $0.93 beat by a penny and adjusted EPS of $1.66 beat by $0.32.

"Our comprehensive pandemic response shows the power of a diverse and agile enterprise. We've opened more than 4,000 COVID-19 test sites across the country since March, and have administered over six million tests. We're helping businesses and universities safely reopen and we were recently selected to administer COVID-19 vaccinations in long-term care facilities,” says CVS CEO Larry Merlo.

On a segment-basis pharmacy was the weak spot with revenue down 0.9% over the same period last year. Offsetting that is strength in both retail and healthcare services up 5.9% and 8.8% respectively and all three better than the consensus. Looking forward, the company expects this strength to continue into the fourth quarter and drive results well ahead of the previous guidance.

For the 4th quarter, CVS is expecting adjusted and GAAP eps in a range above the high-end of the previously stated range. Along with that, the company is expecting to generate upwards of $12.75 billion in operating cash flow versus $11.5 billion at the high end of that range. The bottom line, CVS underlying business is strong, growing from the pre-pandemic levels, and driving ample cash and free-cash-flows.

CVS Pays A Healthy Dividend, And One That Should Grow Soon

CVS not only pays a healthy dividend but it also has a history of dividend increases and the capacity to do so again. It has been a few years since the last increase, I know, but the times they are a-changin. While CVS is still carrying some debt it’s not cumbersome, the company is more than well-capitalized, and there is ample free cash flow. At face value, the payout is running at less than 30% of earnings and the coverage ratio backs that up. In terms of leverage, the company is only running about 4.75X free-cash-flow which is pretty low. In terms of cash, the company is sitting on nearly $20 billion or about $13 per share, more than enough to fuel acquisition, improve the already good debt situation, and leave the company sitting pretty. The stock yields about 3.10% with shares trading near $65.

The Technical Outlook: CVS Is In Reversal, Wait For The Signal Before Buying

Shares of CVS appear to be putting in a bottom in the $52.50 to $62.50 range but there is a risk. The price action looks bullish and the 3Q news supports upward bias but the reversal is not yet complete. The baseline of the pattern is still providing resistance and could keep prices from moving higher. If shares of CVS can break above $67.50 I might start nibbling, if price action can break above $70 I’ll feel even more bullish about it.