Mizuho Recommends Buying CVS (CVS) on Today's Weakness, Driven by Retail

November 8, 2016 8:46 AM EST
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Price: $80.13 +2.59%

Rating Summary:
    22 Buy, 7 Hold, 1 Sell

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Mizuho Securities analyst Ann Hynes weighed in on CVS Health (NYSE: CVS) after the company post rare guidance reduction on retail weakness.

Hynes commented, "CVS reported a 3Q beat (adjusted EPS of $1.64 versus consensus $1.57E), but lowered 2016E guidance by 1% at the midpoint. 2017E initial guidance was provided early (usually given in December) and its 10% below our and Street estimates at the mid-point. CVS also provided an updated on its long-term guidance at +10%, which is below current of +10-14% but in-line (or better) than Street expectations given the lack of generic introduction in the coming years versus previous LT guidance."

She added, "An increase in restricted pharmacy networks in 2017 will drive a loss of 40mm scripts. This is not a surprise given the well publicized loss of the Tricare contract (our estimate for that contract alone was 26mm scripts) and WBA JV's with Optum on 90-day retail and WBA's inclusion in Medicare Part D networks. What is a surprise is the profitability impact of these lost scripts. Given most of the lost scripts are government, we had assumed a lower gross profit than the company average. The second surprise is that CVS stated they are seeing an overall weakness in Rx growth and a soft seasonal business."

"It was well-known CVS was going to update its long-term guidance target at its investor day in December. However, the company provided it early and expects +10% growth in adjusted EPS for the longer term, which is in-line with our estimates. We have written about this issue previously and based on many investor conversations, we think the +10% is in-line or better with expectations given the awareness CVS could not maintain the +10-14% given the waning generic launch cycle over the next five years versus the previous five-years."

The firm would be buyers on today's weakness. "Although 2017 initial guidance was a disappointment due to competitive pressures from retail networks, long term guidance remains intact. We suspect the loss of the Tricare business in October was a surprise and CVS needs to right-size it business for the new reality of limited retail networks. That being said, this is a top-notch management team, with a solid balance sheet and cash flow. We would buyers on today's weakness."

The firm had a Buy rating and price target of $110 on CVS into the results.

For an analyst ratings summary and ratings history on CVS Health click here. For more ratings news on CVS Health click here.

Shares of CVS Health closed at $83.39 yesterday.



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