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CVS Health (CVS) Up 21.3% Since Last Earnings Report: Can It Continue?

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Zacks Equity Research
·4 min read
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It has been about a month since the last earnings report for CVS Health (CVS). Shares have added about 21.3% 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 the most recent earnings report in order to get a better handle on the important drivers.

CVS Health Q3 Earnings Top Estimates on Robust Health Care Benefit Sales

CVS Health’s third-quarter 2020 adjusted earnings per share of $1.66 declined 9.8% year over year but exceeded the Zacks Consensus Estimate by 23.9%. The adjusted earnings per share figure takes into account certain integration costs pertaining to the buyout of Aetna and asset amortization costs along with other adjustments.

On a reported basis, the company’s earnings of 93 cents per share improved 20.5% year over year.

Total revenues in the third quarter rose 3.5% year over year to $67.06 billion. The top line also beat the Zacks Consensus Estimate by 0.8%.

Quarter in Detail

Pharmacy Services revenues were down 0.9% to $35.7 billion in the reported quarter. Client losses and continued price compression were partially offset by improvements in specialty pharmacy and brand inflation.

Total pharmacy claims processed rose 3.7% on a 30-day equivalent basis, attributable to strong net new business, partially offset by reduced new therapy prescriptions.

Revenues from CVS Health’s Retail/LTC were up 5.9% year over year to $22.73 billion. In the quarter, increased prescription volume, higher front store revenues, increased diagnostic testing and brand inflationwere partially offset by continued reimbursement pressure and the impact of recent generic introductions.

Front store revenues increased 2.7% year over year on strength in consumer health sales and an increase in basket size, partially offset by reduced customer traffic in the retail pharmacies due to the pandemic. Prescriptions filled too rose 4.6% on a 30-day equivalent basis on continued adoption of patient care programs. This was partially offset by reduced new therapy prescriptions.

Within Health Care Benefits segment, the company registered revenues worth $18.47 billion in the third quarter, up 6.1% year over year. The improvement was primarily driven by membership growth in the Health Care Benefits segment's government products and favorable impact of the reinstatement of the HIF (Health Insurer Fee) for 2020. This was partially offset by the divestitures of Aetna’s standalone Medicare Part D prescription drug plans and Workers Compensation business, membership declines in the segment’s commercial products and planned COVID-19 related investments.

Margin

Gross profit improved 7.2% to $26.1 billion. Gross margin expanded 134 basis points (bps) to 38.9%. Operating margin in the quarter under review grew 212 bps to $26.3 billion on a 12.5% rise in operating profit to $17.6 billion.

Outlook

CVS Health raised its 2020 adjusted EPS and cash flow guidance.

Adjusted earnings per share is expected in the band of $7.35-$7.45 (up from the earlier band of $7.14-$7.27). The Zacks Consensus Estimate for 2020 earnings is pegged at $7.24.

Full-year operating cash flow is expected in the range of $12.75 billion-$13.25 billion compared with the earlier projection of $11 billion-$11.5 billion.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -8.29% due to these changes.

VGM Scores

Currently, CVS Health has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top 20% 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.

Outlook

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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