On completion of the gigantic $1.9 billion worth Target pharmacy acquisition yesterday, shares of CVS Health Corporation CVS jumped 5.4% to reach $97.56. Alongside, the company’s revelation of an impressive and upgraded outlook for 2016, strategic achievements in 2015 and an increased dividend structure boosted investor sentiment. CVS Health’s raised earnings guidance for 2016 accompanied by its reaffirmed five-year financial targets reflects the company’s efforts to enhance its value in the evolving healthcare market.
Per management, CVS Health’s consumer expertise will enable the company to offer better health care at reduced overall cost, in an increasingly consumer-directed healthcare environment. This should duly help address the cost-quality-access challenge in health care. The company announced these updates at its Annual Analyst Day, recently held in New York.
2016 Outlook and 5-Year Financial Targets
For 2016, CVS Health raised the midpoint of its previous outlook of $5.68–$5.88 (reflecting annualized growth of 10–14%) and now expects to deliver adjusted EPS in the range of $5.73–$5.88, representing annualized growth of 11.25–14.25%. This new bottom-line guidance reflects a rise of 5 cents at the lower-end of the previous outlook. The current Zacks Consensus Estimate for CVS Health is pegged at $5.81 for 2016, within the predicted range.
Notably, this new adjusted EPS outlook excludes the effect of acquisition-related integration costs and assumes the completion of $4 billion worth of share repurchase during 2016, consistent with CVS Health’s earlier provided five-year financial targets.
Moreover, the company currently expects to deliver free cash flow of $5.3– $5.6 billion and cash flow from operations of $7.6– $7.9, in 2016.
Key Achievements in 2015
Per management, 2015 has been a meaningful year for CVS Health. Key accomplishments in this period include strong financial expectations consistent with previous guidance; a strong 2016 selling season for the pharmacy benefit management business with $11.5 billion in net new business and a client retention rate of 98%; superior specialty revenue growth of approximately 33%, outperforming the rapidly-growing specialty market; enhanced generic sourcing through the Red Oak Sourcing venture with Cardinal Health; the acquisition of Omnicare – a leader in long-term care pharmacy; the transaction to acquire and operate Target's pharmacies and retail clinics; continued advancement of the company's front-store growth strategies with focus on enhancing health and beauty offerings, store brands, personalization and digitization; and elevated awareness of the CVS Health brand introduced last year.
Dividend Hike
CVS Health also announced a 21% hike (approved by its management) in its quarterly cash dividend, to $0.425 per share of the common stock of the company. The increase translates to $1.70 per share annually, up 30 cents per share. The increased quarterly dividend will be payable on Feb 2, 2016, to shareholders of record on Jan 22, 2016. Interestingly, this marks the company's thirteenth consecutive year of dividend increase. Since 2011, the compounded annual growth rate in dividends has been 28%.
Target Deal Closed
Finally, on Dec 16 (the same day as the Analyst event), CVS Health completed its Target pharmacy deal for $1.9 billion. The proposed acquisition transaction had been announced in June 2015. The buyout aims to combine the expertise of two retail giants in the U.S., taking forward both their goals of investing in core businesses that help drive growth.
Post the closure of the deal, CVS Health will now have control over Target’s 1,672 pharmacies across 47 states, which the former will operatethrough a store-within-a-store format, branded as CVS/pharmacy. Moreover, all new Target stores that provide pharmacy services will incorporate a CVS/pharmacy in it. In addition, CVS Health will rebrand 79 Target clinic locations as MinuteClinic and will open up to 20 new clinics in Target stores within 3 years post the closure of the deal. The Target pharmacies and clinics will come under the CVS Health banner and systems within 6–8 months.
The Road Ahead
Valued at $2.9 trillion, the U.S. healthcare industry stands firm and is growing. As one of the largest retail giants in the space, CVS Health expects to capture a larger share of this huge market potential, going ahead. This confidence is evident from its raised EPS outlook for 2016, further backed by the recently completed vital Target pharmacy deal.
Zacks Rank
Currently, CVS Health has a Zacks Rank #3 (Hold). Some better-ranked medical stocks are Natus Medical Inc. BABY, Masimo Corporation MASI and Steris Plc STE. All the three stocks hold a Zacks Rank #1 (Strong Buy).
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