How CVS Health Is Faring During the Pandemic

In this episode of MarketFoolery, host Chris Hill and Motley Fool analyst Jason Moser talk about CVS Health's (CVS 1.49%) fourth-quarter profits coming in higher than expected. CEVA (CEVA -2.61%) pops on a strong end to the fiscal year and AutoNation (AN -0.31%) hits a new high and announces a $1 billion share buyback plan. Plus, they discuss the death of Marriott (MAR -0.13%) CEO Arne Sorensen and his legacy leading the largest hotel chain in the world.

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This video was recorded on February 16, 2021.

Chris Hill: It's Tuesday, February 16th. Welcome to MarketFoolery, I'm Chris Hill. Joining me today, Jason Moser in the house. Good to see you.

Jason Moser: Howdy, how are you?

Hill: I'm doing all right. We've got a bunch of things to get to. We've got auto sales, we've got tech earnings. We're going to start with healthcare. Fourth quarter profits for CVS Health came in higher than expected. Foot traffic is down in the stores, which is to be expected, but pharmacy sales are up. CVS is doing COVID-19 testing, as well as vaccines. It seems like this was a pretty solid quarter.

Moser: When you look at CVS, this hasn't been the greatest investment over the past several years. I wonder though, if we won't see going forward, perhaps, some goodwill and some brand equity come from all of this stuff that's coming with the pandemic. Because I think CVS ultimately is being seen as a part of the solution. You're right, they've been selected as one of the national partners for the Federal Pharmacy Partnership Program, and that's ultimately what is behind the Biden administration's plan to vaccinate 300 million Americans by the end of the summer. Lofty goal, no doubt about it. But I think when it comes to something like that, you've got to go big. They've been a central part of the vaccines in regard to the long-term care homes. I think all together, understanding the challenges that the company has seen over the past year or so, but also seeing the transformation that it's having to make, we've talked about these businesses, whether it's CVS or Walgreens, for example. They're really trying to become more healthcare centers. They are trying to make that step beyond just being a retailer and going more toward being a full care provider. That was part of what was behind the Aetna acquisition, that's part of what is behind all of the virtual healthcare investments, and then healthcare center type investments that they are making.

Revenue growth 4%, nothing to sneer at. Operating income was down over 20%, that was due to pandemic expenses, reimbursement pressure. We know obviously, this is a business that's very leveraged to the pharmaceutical industry. But all things considered, the three segments of the business put together, it seems like they perform pretty well on the difficult time. Again, I think the path going forward, these guys are going to be pretty busy in the coming year and beyond, so that should work out well for them, I think.

Hill: Unlike some other stocks that we've seen over the past year, CVS Health as a stock is basically flat. You combine that with the fact that there's a new CEO, Karen Lynch, who just took over a couple of weeks ago. I don't know. It seems like you could have worse entry points for a really strong brand in the healthcare space.

Moser: It feels like it. I think that we're really seeing CVS and Walgreens rise to the surface here, rising to the top, and being really the two national chain drugstore providers that stand to do well here in the coming years. I don't think this is an industry that's on the way out. I think it's an industry that's in a state of true evolution. Again, we saw several years back even the relationship with CVS formed with Teladoc Health early on in order to offer those virtual care services. Now, they have many clinics. They have health hubs, they have telemedicine offerings. In an interesting test that they're just running out of here now, they rolled out their first virtual, first primary care offering to one of its biggest customers. This is something that's going to continue. Again, this is in line with that relationship that they have with Teladoc Health. Teladoc made this big push to build out a new primary care of virtual style offering there. It seems like we're at a point where the healthcare landscape is shifting. We have a growing population and growing demand, a limited supply, and so CVS is turning to technology to help alleviate that supply, and help scale healthcare, which I think is one of the biggest challenges. In the longer-term, it seems like there's a lot more opportunity.

Hill: CEVA is in the business of licensing wireless connectivity and smart sensing technologies. CEVA's fourth-quarter must have been fantastic because shares [laughs] are up to 13% and hitting a new high. Walk me through this because this is a company that I'm pretty unfamiliar with. They have a royalty model in terms of how they generate revenue?

Moser: Yeah, this is a cool little company, and you can't find many really small caps in the tech space today, but this is really a genuine small cap still. But maybe that doesn't last for long.

Hill: A few more days like this, [laughs] it's not going to be a small cap for much longer. [laughs]

Moser: Hopefully. For investors, that works out well, and we will feel good about that. But they operate a licensing and royalty business model. Ultimately, they possess all of this intellectual property, where we talk about the value of IP in all different businesses, and technology is no exception. This is a licensing and royalty business model where they own this portfolio of intellectual property that serves primarily the semiconductor industry, but tech in general. The technology that they license helps enable all sorts of cool applications, including AR and VR and Internet of things, robotics, all things there. Again, a small company, but one that is really starting to grow by virtue of the deals that they're signing. Revenue was flat for the quarter, but up 15% for the year. They had a big breakthrough through the $100 million annual revenue barrier of this year. That really shows you how small this company is, $100 million, they were calling for around $95 million, so they exceeded their own guidance.

But a lot of this really centers around new deals that they are signing. It's their license at that technology with a focus on things in Bluetooth and Wi-Fi and IoT as we talk about this rollout for 5G. Plenty of base station technology in IOT, Internet Of Things, technology opportunity there for the business. It contributed about $6.5 million of the overall revenue figure for the quarter, that was up 50% from a year-ago. To give you an idea of how wide reaching CEVA's technology is for the year, globally speaking, 1.3 billion -- with a "b" -- units shipped with some form of CEVA technology in them. That was up 27% from the year-ago. The basic idea is, as we move toward this age of connectivity and more and more devices, this is a big opportunity for CEVA. They had that long tail of licensing and then royalty revenue, that can be very attractive for investors.

Hill: Sad news this morning from Marriott, CEO Arne Sorenson died Monday at the age of 62. It was just two weeks ago that the company said he would be temporarily reducing his schedule to undergo a more demanding treatment for pancreatic cancer. Obviously, our thoughts go out to Arne Sorenson's family and friends. As for Marriott International, Jason, the board of directors says they're going to take the next two weeks to find a new CEO, and I wish them luck, because Arne Sorenson leaves behind big shoes to fill. He was the CEO for almost a decade, overseeing that Starwood acquisition. Marriott's the biggest hotel chain in the world. By the way, the stock was outperforming the market when he was in the corner office.

Moser: Yeah. You said it perfectly, I think big shoes to fill indeed, particularly now, given the challenges that they're going to be facing here in the coming years with the shifting travel market, right? I mean, we're seeing the gig economy, the sharing economy. You've got your VRBOs and your Airbnbs really starting to take share of vacationers' wallets. It feels like Mr. Sorenson was really the man with the skill set to lead this company to that next level. Unfortunately, time waits for no one. To your point there, the stock was up 283% during his time as CEO versus the market's 180%. That's in the face of a very difficult 2020, right? I mean, he more than doubled the topline numbers for Marriott over his time. Then, ran into 2020, which was just difficult for virtually everyone in the travel industry in particular that hit really hard. All things considered, I mean, I think he's put this business in a very good position for whoever takes over. But to your point, yes, that's going to be a tough act to follow.

Hill: Shares of AutoNation are hitting a new high today; fourth-quarter results came in better than expected. AutoNation also announced a $1 billion share buyback plan. Just to start with that for a second, look, we've seen plenty of companies come out and announce share buyback plans that are bigger than this. This is a $7 billion company. So just on a percentage basis, this is a pretty big move for them.

Moser: It is. I've never really looked at auto dealers as some super attractive opportunity. I think probably more of that is just, historically, it's not a very pleasant experience, right? I think that you've probably been out and bought a vehicle just like I have and then thought, "You know what? That could have been better." You look at that, you think, "Well, all right, maybe that's not exactly where I feel like investing my money." But we're starting to see some disruption in the space. The big word, I think, over the past couple of years that retailers have been throwing around more and more, is that omni-channel experience, right? I mean, focusing on just being where the customer is, delivering the experience the customer wants, however they may want it. We're starting to see AutoNation really focusing on that, investing a little bit more on their digital presence. Maybe AutoNation is a way this industry starts to look here in the future. You've got other concepts out there, Carvana and CarMax that do a little bit of something different.

This is a business that does something that obviously isn't going out of style anytime soon. They sell cars and they sell new and used cars. New represents about 52% of overall sales. If you look at cars in general, new and used cars are around 80% of this company's total revenue. So, they have a small parts side of the business and the small financing side of the business, but really, it's about selling cars. Same store revenue was up 5% from a year ago. Adjusted earnings, very strong, $2.43, that was up 94% from a year ago. There was a charge from an investment in Vroom that they closed out recently, not included in there, so that adjustment changes that math a little bit, but to that point on the Vroom investment and that was a little bit more of that investment in going digital.

The Vroom investment worked out really well. I mean, they made a lot of money on that investment, but they closed it out because they feel like the relationship wasn't really working out. Their big focus really here at AutoNation, they're continuing to build out this AutoNation U.S.A. pre-owned store. That's going to be a little bit more of a direct shot at something like a CarMax. But to your point there, I mean, they are buying back a lot of stock since 2015 to share counts now 18% and it sounds like that is going to continue. Hey, maybe in a market where it seems like growth is the only way to invest in, maybe there's a value style play out there in something like an AutoNation today.

Hill: When I think about the car-buying experience, it really does seem like there's a tremendous opportunity. There are others out there, but the two that leaped in mind are AutoNation and CarMax. It's basically just how easy can you make it? Because car buyers are so much more informed as a group today than they were 10-20, certainly 25-30 years ago. A lot of times, when people are looking to buy a vehicle of some sort, they've done their homework. They've certainly done a lot more homework in general than they were doing 20 years ago. If you walk onto the lot, particularly in the case of CarMax or an AutoNation where it's like, "I've picked up my car. I know exactly where it is. This is the one I want. Great. How quickly can you get me out of here?" I just think about GEICO and the way they just hammer that message of 15 minutes can save you 15% less. At some point, one of these companies is going to figure out how to automate their system or get it as close to automation as possible, that they're going to come out with a marketing campaign that basically says, "We'll get you out in under an hour." If they can do that, that's enormous.

Moser: Yeah, it feels like we're definitely headed in that direction with all of the different options available now. E-buying is something, like you said, it just didn't exist years ago. Part of the problem when you buy a vehicle, there's a transparency issue, right? I don't want to go into one dealership and feel like I'm negotiating a completely different number than I would negotiate at another dealership in the same general area, but it feels that way. Generally speaking, I think it's more or less a correct perception, I think, for the most part. If they can bring transparency to an otherwise less than transparent industry, that could really go a long way. Last new car I bought, I feel like I was there for probably, I don't know, three to four hours. I'm like, "Guys, I'm just trying to pay you money and get this car." It just wasn't easy. It makes me not want to do it ever again.

Hill: To move away from car buying for a second, think about how Airbnb and VRBO have tweaked their platforms so that now, as opposed to maybe four years ago, you know upfront what all the costs are.

Moser: Yeah.

Hill: There was a stretch of time early in those platforms where you would get all the way to the end. You'd pick out the place, you'd say, "Oh, this is how much it is per night?" You get all the way to the end, and then at the very end, when you are about to click the "Buy" button, they'd be like, "Oh, by the way, here's the cleaning charge. Here's the [...] thing." Whereas opposed to now where they're just like, "Here it is, it's all upfront."

Moser: Yeah, it's like that Seinfeld where Puddy's work in the dealership and Jerry goes in there, he's his buddy, and he's getting this great price, and then something happens mid deal where the relationship goes sour and then Puddy starts adding on all these extras and incidentals, spraying the undercarriage, yada, yada, yada. I mean, that's what it feels like. Hopefully, companies like AutoNation will be able to steer us away from that, no pun intended.

One thing I did want to know real quickly and then I'll let it die. But it was just interesting to see, we're talking about CEVA before and technology and one of the big opportunities that they see in licensing their technology to the automotive space. It's just worth noting that vehicles now really are just rolling computers, and so many chips go into a new vehicle, that just wasn't the case years and years ago. Even AutoNation is seeing inventory supply chain constraints because of this chip shortage that we're witnessing right now. This shortage in the semi space is playing out in all sorts of different markets and AutoNation is exposed to it as well. They said that the supply for the foreseeable future is going to be a little bit crimped. Demand is going to outpace supply. Now, that's good for them. I mean, you can hopefully realize a little bit of pricing there, but it's just interesting to note how this semi shortage just doesn't discriminate, it's hitting all sorts of different markets.

Hill: Jason Moser, thanks for being here.

Moser: Thank you.

Hill: As always, people on the program may have interest in stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill, thanks for listening, we'll see you tomorrow.