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CVS Health (CVS) Up 4% Since Earnings Report: Can It Continue?

Zacks Equity Research

It has been about a month since the last earnings report for CVS Health Corporation CVS. Shares have added about 4% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock’s next earnings release, or is it 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.

Recent Earnings

CVS Health reported fourth-quarter 2016 adjusted earnings per share (EPS) of $1.71, up 11.8% year over year. The quarter‘s adjusted EPS beat the Zacks Consensus Estimate of $1.67 by 2.4% and exceeded the company’s guided range of $1.64−$1.70.

According to the company, the solid bottom-line performance was driven by strong Retail/LTC segment results, in line with the company’s expectations and PBM performance, which exceeded expectations.

Without the one-time adjustments, reported EPS from continuing operations in the fourth quarter increased 18.6% year over year to $1.59.

Full-year adjusted EPS came in at $5.84, a 13.2% improvement from the year-ago period and ahead of the company’s guidance range of $5.77–$5.83. It also exceeded the Zacks Consensus Estimate by $0.04.

Net revenue in the fourth quarter increased 10.9% year over year to $45.9 billion but missed the Zacks Consensus Estimate of $46.5 billion. The rise was driven by balanced growth in the Pharmacy Services and Retail Pharmacy segments.

Revenues in 2016 were $177.5 billion, a 15.8% improvement from 2015. However, revenues missed the Zacks Consensus Estimate of $178 billion.

Quarter in Details

Pharmacy Services revenues increased 17.9% to $31.3 billion in the reported quarter on growth in the specialty pharmacy business and higher pharmacy network claims.

Pharmacy network claims processed during the quarter went up 23.9% to 294.3 million, backed by net new business growth. Moreover, the Mail Choice processed claim count was 23.2 million, up 4.7% as the continued adoption of Maintenance Choice offerings and increase in specialty pharmacy claims were partially offset by a decline in traditional mail volume.

Revenues from CVS Health’s Retail/LTC improved 4.7% year over year to $20.8 billion, primarily driven by the addition of pharmacies of Target Corporation which was taken over in Dec 2015. Same-store sales decreased 0.7%, while front-end same-store sales were down 2.9% year over year.

Front-end same-store sales were impacted by soft customer traffic, efforts to rationalize promotional strategies, which were partially offset by an increase in basket size.

Pharmacy same-store sales were marginally up 0.2% in the reported quarter. Sales were affected approximately 380 basis points (bps) due to recent generic drug introductions. Moreover, Pharmacy same-store prescription volumes rose 2% on a 30-day equivalent basis.

The generic dispensing rate (the proportion of all generic prescriptions to total number of prescriptions dispensed) soared 170 bps to 85.4% at the Pharmacy Services segment and 120 bps to 85.2% at the Retail/LTC segment.

Although gross profit rose 4.2% to $7.6 billion, gross margin contracted 120 bps to 16.5%. Total operating margin during the quarter contracted 12 bps to 6.5% on a 0.9% increase in operating costs.

CVS Health exited the year with cash and cash equivalents and short-term investments of $3.45 billion, compared with $2.55 billion at the end of 2015. Net cash provided by operating activities was $10.07 billion in 2016, up 19.7% from the year-ago period.

During the fourth quarter, CVS Health opened 40 new retail stores and closed 25. Further, the company relocated 16 retail stores. As of Dec 31, 2016, CVS Health operated 9,709 retail stores, including pharmacies in Target stores across 49 U.S. states, as well as the District of Columbia, Puerto Rico and Brazil.

2017 Outlook

The company reaffirmed its earlier declared full-year 2017 adjusted EPS and cash flow guidance. Adjusted earnings are expected in the band of $5.77–$5.93. The Zacks Consensus Estimate of $5.86 is within the guided range. Full-year operating cash flow guidance is expected in the range of $7.7 billion to $8.6 billion and free cash flow in the range of $6.0 billion to $6.4 billion.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last one month period as none of them issued any earnings estimate revisions.

CVS Health Corporation Price and Consensus

 

CVS Health Corporation Price and Consensus | CVS Health Corporation Quote

VGM Scores

At this time, CVS Health's stock has a great Growth Score of 'A', a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of 'A' on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregte VGM Score of 'A'. If you aren't focused on one strategy, this score is the one you should be interested in.

Zacks' style scores indicate that the stock is suitable for value, growth and momentum investors.

Outlook

The stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.


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