A month has gone by since the last earnings report for CVS Health (CVS). Shares have added about 3.8% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is CVS Health due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
CVS Health's PBM Selling Season Remains Solid, Retail Grows
CVS Health’s third-quarter 2019 adjusted earnings per share of $1.84 increased 6.4% year over year and also exceeded the Zacks Consensus Estimate by 3.9%. The quarter’s adjusted earnings per share considered certain transaction and integration costs pertaining to the buyout of Aetna and store rationalization charges along with other adjustments.
On a reported basis, the company registered earnings of $1.17 per share, reflecting a 13.9% drop from the year-ago period.
Moreover, total revenues in the third quarter surged 36.5% year over year (after adjusting the interest income on financing the Aetna acquisition, adjusted revenues increased 37.1% year over year) to $64.81 billion. The same also topped the Zacks Consensus Estimate by 2.8%.
The year-over-year revenue rise was primarily driven by the acquisition of Aetna, expanded volume and the brand name drug price inflation in both the Pharmacy Services and Retail/LTC segments, partially offset by a persistent reimbursement pressure in the Retail/LTC, price compression in the Pharmacy Services segment and an increased generic dispensing rate.
Quarter in Detail
Earlier this year, CVS Health realigned the composition of its segments. As a result, the company’s SilverScript Medicare Part D prescription drug plan (PDP) was shifted from the Pharmacy Services segment to Health Care Benefits. In addition, the mail order and specialty pharmacy operations of Aetna were transitioned from the Health Care Benefits segment to Pharmacy Services.
Pharmacy Services revenues were up 6.4% to $36 billion in the reported quarter, driven by growth in total pharmacy claims volume and the brand name drug price inflation. This was, however, partially offset by a continued client price compression and an increase in generic dispensing rate.
Total pharmacy claims processed rose 9.3% on a 30-day equivalent basis, attributable to net new business and the steady adoption of Maintenance Choice offerings.
Revenues from CVS Health’s Retail/LTC were up 2.9% year over year to $21.47 billion. Per the company, the result was based on higher prescription volume and branded drug price inflation, partially offset by a persistent reimbursement pressure and the impact of an increased generic dispensing rate. Front store revenues represented 21.5% of total Retail/LTC revenues in the reported quarter, primarily banking on improved sales of health and beauty products, which benefited from consistent strength in cough and cold products.
Total prescription volume grew 6.4% on a 30-day equivalent basis, boosted by the steady uptake of patient care programs.
Within Health Care Benefits segment, the company registered revenues worth $16.5 billion in the third quarter.
Gross profit soared 52.6% to $11.52 billion. Accordingly, gross margin expanded 188 bps to 17.8%. However, operating margin in the quarter under review contracted 90 bps to 4.5% despite a 13.7% rise in operating profit to $2.93 billion.
CVS Health has updated its 2019 guidance.
Adjusted earnings per share expectation is raised to the band of $6.97-$7.05 from the earlier-provided range of $6.89-$7. The Zacks Consensus Estimate for current-year earnings is pegged at $6.98, within the company’s guided range.
This apart, the company’s 2019 adjusted operating profit estimate is lifted to the $15.22-$15.40 billion band from the previous view of 15.16-$15.36 billion.
Further, the company reaffirmed its cash flow from operations guidance at $10.1-$10.6 billion.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision.
Currently, CVS Health has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, CVS Health has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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