What happened
CVS Health Corporation (CVS 1.15%) disappointed investors in February, with shares of the retail pharmacy falling 14%, according to data from S&P Global Market Intelligence, as the combination of a worse-than-expected outlook and worries about powerful new entrants took their toll on the stock.
So what
At first glance, CVS's fourth-quarter earnings report was strong. The company beat analyst expectations on both the top and bottom lines by reporting $48.4 billion in revenue, a 5.3% year-over-year increase, and adjusted EPS of $1.92.
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However, investors were sour on the company's guidance. In the wake of the new corporate tax cut, CVS said it would increase employee investments (read: raise salaries and increase benefits) and spend more on data analytics and care management solutions. These investments are forecast to put operating profit in a range of 1.5% to a 1.5% loss, down from earlier estimates of 1% to 4%. Shares sold off approximately 5% post-announcement.
Later in the month, shares in the healthcare sector remained under pressure when Amazon.com, Berkshire Hathaway, and JPMorgan Chase announced a combined effort to improve healthcare and lower health costs for its employees. While the announcement was short on details, the track records of CEOs Jeff Bezos, Warren Buffett, and Jamie Dimon were enough to spook investors.
Now what
Still, the biggest catalyst to CVS' stock price will come later this month, when plans to buy healthcare provider Aetna are expected to be completed. In a way, the Aetna acquisition shows a company on defense about possible encroachment into its business by the consortium led by Amazon, a company cable mogul John Malone refers to as the "Death Star." Amazon has further moved into the healthcare space by rolling out its own brand of over-the-counter medications.
That said, it's important to note that Amazon's entrance into healthcare has been more smoke than fire, at least to this point. In the end, CVS will continue to benefit from its scale as the second largest retail pharmacy chain and pharmacy benefit manager. Demographic headwinds and increases in healthcare spending will also continue to boost the company's top line. As such, investors may want to put this cheap stock on their watch lists.
