Analyst Breaks Down CVS Health's 'Complicated' Quarter

CVS Health Corp's CVS second-quarter earnings report can be defined as "more good than bad" yet the stock still trades at a discounted valuation, according to BofA Securities.

The CVS Analyst: Michael Cherny maintains a Buy rating on CVS with an $80 price target.

The CVS Thesis: The second-quarter report, which was released on Aug 5., was mixed as the Health Care Benefits unit reported an EBIT that was 48% higher than expected, the Pharmacy Services unit outperformed by 7%, but the Retail/Long Term Care underperformed by around 16%.

However, Cherny said the Pharmacy Services business underperformed compared to other analysts' expectations, making it the "most complicated quarter in the history of the market to model." Looking forward, it's difficult to determine an appropriate baseline for CVS and this will likely become an annual debate.

The debate is the result of multiple moving pieces around the COVID-19 pandemic as the company noted a 10-cent per share net benefit in the first quarter but a 70-cent to 80-cent net benefit in the second quarter, the analyst wrote in a note. Meanwhile, management's dedication towards transparency is resulting in investors looking at the plethora of information and wondering "what could be going wrong versus what's going well."

"In some respect providing less data might eliminate datapoints that could be viewed as 'noise' as much as anything else," Cherny said. "But at the same time it very rarely makes sense for companies to provide less data, so maybe the better idea is to hone the message in around how the datapoints should be interpreted to eliminate any points of confusion that seem to continually arise."

The bullish case for CVS remains the same now as it has been in the past: CVS is dictating to investors an improving enterprise profitability story backed by an "incredibly healthy" free cash flow and a stock trading at a discounted valuation, according to Cherny.

CVS Price Action: Shares of CVS were trading at $66.12.

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