A Big Earnings Week for Healthcare and Pharma in the Ultimate Income Portfolio
It's been a rocky earnings season, as the negative mood dominating the stock market continues to weigh on prices... and investor sentiment.
Despite better-than-expected results from the mega-cap "Dynamic Duo" of Microsoft (MSFT) and Alphabet (GOOG) last week, and similarly upbeat news from Amazon (AMZN) on Tuesday, the S&P 500 Index (SPX) continues to struggle. With the S&P down about 4.4% from the recent highs, and charts continuing to mimic last year's August-October pullback, stocks are reacting violently to news as it breaks – whether that comes from earnings reports or fresh economic data.
And with the Federal Reserve holding interest rates steady, as Fed Chair Jerome Powell notes that progress has stalled on achieving inflation targets... we could be in for more of this volatility for longer. As the market continues to process the news on that front, Ultimate Income members have their own news to digest: it's been a big week for healthcare and pharmaceuticals, as three companies in our portfolio – Pfizer (PFE), Organon (OGN), and our newest addition, CVS Health (CVS) – all released quarterly earnings reports over the last two days. Let's get into it.
For PFE and CVS, A Tale of Two Stocks
On Wednesday morning, both Pfizer and CVS Health reported results before the bell. And while both sector giants reported shifting costs and revised their profit outlooks, the end results were very different: PFE rose 6%, as CVS plunged a shocking 17% to end the day at its lowest point since 2020.
Pfizer beat Wall Street expectations on both counts, reporting an earnings-per-share (EPS) of $0.82 and $14.88 billion in revenue – roughly 60% and 7% higher than the $0.51 EPS and $13.92 billion revenue expected. Results are still down substantially year-over-year, but Pfizer managed the declines better than analysts expected, thanks in part to strong sales across the board, as well as a surprise contribution from Pfizer's COVID treatment Paxlovid – which brought in $2.02 billion in sales with help from some one-time adjustments.
That's a 50% drop year-over-year, as we put the pandemic further into the rear-view... but well above the $878.2 million in Paxlovid sales the market was expecting. Decreasing costs also pushed gross margins 10% higher than forecasted – which led Pfizer to raise its forward guidance for the year, contributing to the jump in share price.
Unfortunately... the CVS report didn't go nearly as well.
The health and pharmacy company reported an EPS of $1.31 for the quarter, on $88.4 billion in revenue. And while the revenue reported only barely missed expectations of $89.3 billion, the bottom-line profit result came in far below Wall Street's targets: analysts forecasted an EPS of $1.69 – a big 22% miss.
Turns out CVS is suffering from its own success: while the company accomplished its goal of growing its Medicare Advantage business, climbing Medicare costs weighed heavily on the company's overall performance. Higher costs led CVS to slash its forward guidance by 18.5% -- and brought on the similarly steep drop in prices.
Unfortunately, this puts Ultimate Income's latest stock position in a big drawdown... and brings CVS firmly into the Red Zone. But there's still upside potential in CVS as a company, with a Business Quality Score of 86 and a Strong Bullish rating of 89 in the TradeSmith system. We'll need to keep an eye on our position, and keep selling covered calls to earn more cash back income.
Organon Beats Expectations, Fails to Impress
Organon (OGN) released its quarterly earnings this morning, announcing an EPS of $1.22 and revenues of $1.62 billion. The company continues to grow year-over-year, with management highlighting a 46% increase in biosimilars revenue over the last quarter – but noted that costs were rising due to inflation, and that some products were showing demand weakness.
While the results beat Wall Street expectations (of $0.93 EPS and $1.56 billion in revenue), weakness in the healthcare sector as a whole has helped drag OGN's price down from the 3% gain it experienced during pre-market trading. The market continues to be fickle.
As earnings season continues to drive price swings, we'll continue to monitor the situation – and work hard to find you the best trades to navigate these treacherous waters without getting too seasick from the volatility. Look out for more Ultimate Income updates and trade alerts coming soon.
Good investing,
Mike Burnick Senior Analyst, Ultimate Income
P.S. If you have any questions or concerns, please reach out to me at emailmikeburnick@tradesmith.com and include "Ultimate Income" in the subject line.
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