CVS Health: Top Line Strong in Q4, Mega Buyouts Offer Hope
On Feb 22, 2016, we issued an updated research report on Rhode Island-based pharmacy retail giant CVS Health Corp. CVS, which provides integrated offerings across the entire spectrum of pharmacy care.
CVS Health posted a mixed fourth-quarter 2015. While adjusted EPS came in line with the Zacks Consensus Estimate, decent year-over-year growth on the same count was impressive. On the other hand, revenues exceeded the estimate with Pharmacy Services benefiting from growth in specialty pharmacy business and Retail Pharmacy gaining from increased same store sales.
The $12.7 billion mega acquisition of Omnicare reflects CVS Health’s foray into the fast growing long-term specialty care market. CVS Health currently expects Omnicare to be accretive by approximately 20 cents to its 2016 earnings per share (excluding any transaction and integration cost).
We are also positive on the company’s recently closed $1.9 billion acquisition of the pharmacy and clinic businesses of retail giant Target Corporation. This strategic inclusion reflects a bold move on CVS Health’s part to enhance its presence across the country by expanding into new markets such as Seattle, Denver, Portland and Salt Lake City. The acquisition should expand CVS Health's customer base, add a new retail channel for its products and augment customer convenience.
Based on the colossal deal, CVS Health had earlier revealed an impressive and upgraded outlook for 2016 and an increased dividend structure, boosting investor sentiment. The company's raised earnings guidance for 2016 and its reaffirmed five-year financial targets reflect its efforts to build strong value in the evolving healthcare market.
Meanwhile, according to recent data, 3 million people in the U.S. are currently in need of specialty treatment and the potential cost of treatment tends to be very high. With management emphasizing that CVS Health's specialty business remains a top priority for customers, we believe the company is well positioned to capitalize on this opportunity based on its broad, differentiated offerings which include the likes of Specialty Connect.
On the flip side, rising pressure from health maintenance organizations, managed care organizations, PBM companies, government entities, and other third party payers to reduce prescription drug costs and pharmacy reimbursement rates, is expected to impact CVS Health's profitability.
Further, in the highly competitive retail pharmacy business, shareholders of CVS Health anticipate severe competitive threat from the $17.2 billion mega merger between Walgreens and Rite Aid, once the deal closes. Also, the sluggish economic conditions in the U.S. might hamper the company's profit margin.
The stock currently has a Zacks Rank #3 (Hold).
Key Picks in the Sector
Some better-ranked medical products stocks are Hill-Rom Holdings, Inc. HRC, OraSure Technologies, Inc. OSUR and Vascular Solutions Inc. VASC, all with a Zacks Rank #1 (Strong Buy).
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