CVS Health’s stocks climbed by over 2% on Wednesday, in stark contrast to the S&P 500’s 2.5% drop amid a tumultuous session that was rocked by the Fed’s latest policy signals.
The US health-care company was able to defy the broader market selloff on Wednesday thanks to better-than-expected third-quarter earnings:
The figures confirm a long trend of positive EPS surprises that stretches back to Q1 2016.
The upbeat performance shows that CVS’s plans to diversify away from its traditional identity as a retail pharmacies chain and into insurance is paying off, with the insurance business posting a near-10% year-on-year increase in sales.
And it’s not just the backward-looking trend that helped sparked positive sentiment for its stock.
Full-year 2022 is also looking brighter for CVS Health:
Beyond the Q3 financial results, positive sentiment surrounding the stock may have been bolstered by news that CVS Health has reached a US$5 billion settlement over its alleged role in contributing to the US opioid crisis.
This is a major development which should mark the end of this protracted 5-year long saga, involving nearly 4,000 lawsuits pertaining to a crisis that’s been blamed for over half a million deaths in the US over the past 20 years.
However, the outlook for 2023 and beyond may not be so bright.
Keep in mind that the US$5 billion settlement will be paid out starting next year and spanning over the next decade; these settlement payments could dampen CVS Health’s financial performance.
Also, looking further out to 2024, CVS Chief Financial Officer Shawn Guertin cited “earnings headwinds”, with the company set to lose out on US$2 billion for that year due to the loss of a contract with Centene Corp. for pharmacy benefits and also lower star ratings by Medicare.
Still, CVS Health is staying the course with its diversification plans.
Back in 2018, pharmacies accounted for about 60% of CVS Health’s total revenue. That share now accounts for less than half (46.8%) as of the three-months ending September 30th.
And the company is looking to lower that share, while ramping up the contributions of its health care benefits segment.
While the immediate term may look bright, the coming years may be challenging from an earnings perspective.
CVS Health would require time for these acquisitions to bed in and produce the desired results, in achieving its long-term goal of reaching double-digit EPS growth by 2024.
CVS Health bulls may retest 200-day SMA as immediate resistance
Looking at the price charts, yesterday’s jump in CVS Health’s share prices immediately tested its 200-day simple moving average (SMA) as the immediate resistance, though was unable to hang on much of those gains.
If broader risk sentiment remains conducive, bulls could be savouring another attempt to break above that key technical level and breach the psychologically-important $100 mark – a level not seen since early October.
If so, the next target for bulls could be that early October cycle high at $101.07, with stronger immediate resistance set to arrive at 61.8% Fibonacci retracement level around $101.73.
To be clear, CVS remains stuck in its downtrend, and is some 3.5% below its highest-ever closing prices registered on February 8th this year.
Note also the recent failed attempt to form a ‘golden cross’ (where the 50-day SMA can break above its 200-day counterpart) back in early October.
While bulls have done a admirable job in having CVS Health boast a smaller year-to-date drop of 6.2%, in stark contrast to the S&P 500’s dismal 2022 of having shed 21.1% so far this year, it still has all to do in being restored to recent heights.