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Buy CVS Health (CVS) Ahead of Q2 Earnings?

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Christopher Vargas
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CVS Health CVS will be reporting their second quarter performance before the opening bell on Wednesday. The company hasn’t been able to stay in the green this year, down 17.9% year-to-date. Furthermore, the broader retail drug stores market has struggled as a whole this year, down 20.7%.

The company is coming off earnings and revenue beats in Q1 and is looking to repeat this in Q2. The ongoing issue of Medicare-For-All has made the pharmacy and drug market volatile in recent months. Can CVS kickstart its second half of 2019 with a strong Q2 report? Let’s see how Zacks estimates have the company performing in Q2.

Overview and Q1 Performance

The company is based out of Woonsocket, Rhode Island, and changed its name to CVS Health from CVS Caremark to better reflect its health commitment. In November 2018, CVS Health acquired insurance giant Aetna for $70 billion. The company reports in four segments: Pharmacy Services, Retail/LTC, Health Care Benefits, and Corporate/Other. The company’s pharmacy services segment provides pharmacy benefit mangers (PBM) solutions. The company recently benefited from the Trump administration’s decision to withdraw its proposal to eliminate rebates from government drug plans. The plan would have effectively lowered the prices of drugs for consumers by hindering the profits of PBM.

In Q1, CVS Health brought in $61.6 billion in revenue and reported earnings of $1.62 per share, beatings estimates by 8% and 1.9%, respectively. In addition, the reported bottom-line was a jump of 9.5% and the top-line was a surge of 34.8%. Net income was $1.43 billion for a 42.99% gain from Q1 2018. The company’s pharmacy services segment jumped 3.11% to $33.56 billion while the retail/LTC segment generated $21.1 billion for a jump of 3.3%. The health care benefits segment reported $17.87 billion in Q1 which was primarily driven by the Aetna acquisition.

Q2 Outlook

Consensus estimates are calling for CVS to report EPS of $1.70 and total revenue of $62.61 billion for a jump of 0.59% and 34.05%, respectively. Key Company Metric estimates are forecasting pharmacy services to post $34.18 billion in revenue for a 2.79% jump. The retail/LTC segment is predicted to gain 2.77% to $21.24 billion. The pharmacy network that is within the pharmacy services segment is projected to jump 5.65% to $21.73 billion. Mail choice (also within pharmacy services) is projected to jump 5.22% to 75.65 million. In the retail segment, prescriptions filled is expected to increase 5.86% to 349 million. The total number of stores is expected to add 45 to the Q1 number, bringing it to 9,945.

CVS Health is highly optimistic about the merger with Aetna. They believe Aetna’s analytics and CVS’s “touch of humanity” on the health care side provides a platform to better serve consumers. Over the last few quarters, the retail/LTC segment registered positive revenue growth after several quarters of sluggish performances. The 3.3% growth in Q1 was driven by continued adoption of patient care programs and collaborations with PBM. The increasing demand for PBM and specialty pharmacy, along with continued growth in the retail segment, will bode well for CVS.

Additionally, PBMs being clear from federal regulation for the moment also sit well for CVS and other companies like Cigna CI and UnitedHealth UNH. CVS Health is listed as a Zacks Rank #3 (Hold) with a Style Score of A in Value. CVS has historically traded at a discount relative to its industry for the better part of 3 years.

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