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Why CVS Health Is Getting Slammed Today

By Brian Feroldi – Updated Apr 18, 2019 at 5:19PM

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Shares drop after the company admits that 2019 will be a "transition" year and issues disappointing guidance.

What happened

In response to management reporting fourth-quarter earnings and sharing guidance for 2019, shares of healthcare giant CVS Health (CVS -0.48%) dropped 7% as of 11:05 a.m. EST on Wednesday.

So what

Here's a review of the headline numbers from the company's fourth quarter:

  • Revenue grew 12.5% to $54.4 billion. The double-digit jump is largely attributable to the completion of the $70 billion takeover of Aetna. This figure lagged the $54.6 billion that Wall Street was predicting.
  • GAAP earnings were a loss of $0.37 per share. This includes a $2.2 billion goodwill impairment charge related to its acquisition of Omnicare in 2015.
  • Adjusted earnings grew 11% to $2.14 per share. This figure was ahead of the $2.05 that market watchers had predicted.
CVS Health corporate sign.

Image source: CVS Health.

Here's the guidance that is being shared with investors for the upcoming quarter and year:

  • First-quarter 2019 revenue is expected to land between $59.6 billion and $60.5 billion. The midpoint is slightly ahead of the $59.8 billion that Wall Street was expecting.
  • First-quarter 2019 adjusted EPS is expected to land between $1.49 and $1.53. That's well below the $1.67 that market watchers were predicting.
  • Full-year 2019 revenue is expected to land between $249.8 billion and $254.3 billion. That's ahead of the $247.6 billion that Wall Street had expected.
  • Adjusted EPS is expected to land between $6.68 and $6.88. That's much lower than the $7.41 consensus estimate among analysts.

Traders sold off the company's stock hard in response to the disappointing guidance and goodwill writedown.

Check out he latest CVS earnings call transcript.

Now what

CVS Health's CEO Larry Merlo knew that the company's guidance wasn't going to sit well with investors, so he did his best to soften the blow:

2019 will be a year of transition as we integrate Aetna and focus on key pillars of our growth strategy. We are fully aware of the need to address the impact of certain headwinds that are having a disproportionate impact in 2019 compared to prior years, and importantly, we are taking comprehensive actions to move past them. We understand acutely the importance of balancing near-term execution with longer-term vision, and we are confident that our actions will position us well in 2020 and beyond.

CEO Merlo has remained steadfast in his belief that the company's multiyear acquisition binge would create shareholder value over time. However, the company's stock has badly underperformed the market over the last one, three, and five years, so that theory hasn't worked out for investors just yet.

With management calling for 2019 to be a "transition" year that features a year-over-year decline in adjusted earnings, I have a hard time seeing this healthcare conglomerate revisiting its former all-time high anytime soon.

Brian Feroldi has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.

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