CVS Health Corporation CVS recently announced strategies to drive long-term growth and shareholders’ value. We note that these initiatives are part of the company’s efforts to meet objectives like delivering more affordable, accessible and effective healthcare services. The company announced a few updates to its earlier 2016 and 2017 guidance.
2016 & 2017 Guidance Revised
The company reaffirmed its previously announced adjusted EPS outlook at $5.77–$5.83 for 2016 and $5.77–$5.93 for 2017. The adjusted EPS guidance assumes the completion of $5 billion in share repurchases during 2017. Reported EPS guidance from continuing operations for 2016 and 2017 has however been narrowed to the range of $4.82–$4.88 for 2016 (from $4.84 to $4.90) and $5.02–$5.18 for 2017. This reflects an estimated $35 million asset impairment charge and roughly $230 million lease obligation charges, respectively, for store rationalization related to the enterprise streamlining initiative.
The company reaffirmed its cash flow from operations outlook at the range of $9.1 billion to $9.3 billion and free cash flow at $6.8 billion to $7.0 billion for 2016. In 2017, the company expects to deliver cash flow from operations of $7.7 billion to $8.6 billion and free cash flow of $6.0 billion to $6.4 billion.
The reported EPS range from continuing operations for 2016 and 2017 has been updated to reflect an estimated $35 million asset impairment charge and roughly $230 million of lease obligation charge for store rationalization related to the enterprise streamlining initiative. Reported EPS is now estimated in the band of $4.82–$4.88 for 2016 and $5.02–$5.18 for 2017.
The company also announced an 18% increase in annual dividend for 2017 to $2.00 per share, up 30 cents over the 2016 figure. In addition, as stated during the company's third-quarter earnings report, the company now has over $18 billion authorized for share repurchase for the next few years, including the new $15 billion of share repurchase authorization.
Management believes that CVS Health has the ability to deliver healthcare through market-leading technologies. With the rising consciousness of healthcare management by patients, the company mainly focuses on retail pharmacy which requires the highest frequency of patient interaction. The personal interaction between patients and clinicians provide the company an unmatched ability to change consumer behavior and drive health outcomes at a lower cost.
Management also stated how CVS Health's pharmacy benefit management business continues to be a successful one. The segment is having a successful selling season and is constantly offering new bundled services to meet the latest health care challenges. Recently, the company rolled out a new program – Transform Diabetes Care – which will help its pharmacy benefit management (PBM) clients improve health outcome of diabetic patients and bring down medical costs associated with the disease by improving medication adherence, glycated hemoglobin (A1C) control and lifestyle management. Growth strategies for the front store, long-term care pharmacy and MinuteClinic businesses were also outlined in the meeting. We expect that CVS Health’s growth prospects in the newly issued outlook get reflected in its performances of forthcoming quarters.
Price Performance & Fundamentals
In the last six months, CVS Health has underperformed the Zacks categorized Retail-Drug Stores Sub industry trend with respect to share price performance. The stock’s price was further hit by the release of the company’s mixed third-quarter results. CVS health is presently down 18.0%, wider than the 8.8% decline of the Retail-Drug Stores Sub industry.
During the quarterly report, management issued a slashed guidance which was a concern for the recovery of the company’s debacle. However, at the Analyst Day meeting, management reviewed the company's outlook for 2016 and 2017. We expect CVS Health’s new strategy to boost its share price. The decision to review its guidance was largely backed by the recent changes in the marketplace. The company therefore puts a plan to reap robust level of returns.
We also note that CVS Health has a 5-year CAGR revenue of 9.4%, reflecting its strong fundamentals. The company also has a strong 5-year EPS CAGR of 16.5%, which has been particularly robust in the past three years. The company claims that its strong earnings growth, solid working capital management, disciplined capital investments and sound debt management have strengthened its cash position and boosted shareholders’ value. Management is targeting 10% growth in adjusted EPS over the long term and expects $7–$8 billion of cash to be available annually for increasing shareholders’ value.
Zacks Rank & Key Picks
CVS Health carries a Zacks Rank #4 (Sell). Better-ranked medical stocks are NxStage Medical Inc. NXTM, Baxter International Inc. BAX and Bovie Medical Corporation BVX. NxStage Medical and Baxter International sport a Zacks Rank #1 (Strong Buy) while Bovie Medical carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
NxStage Medical rallied 27.5% over the last one year compared with the S&P 500’s 10.7%. The company has a four-quarter average positive earnings surprise of 46.3%.
Baxter International rose 20.1% over the last one year, much higher than the S&P 500. It has a trailing four-quarter average positive earnings surprise of 27%.
Bovie Medical recorded a 134.5% gain in the past one year, way better than the S&P 500. The company has a trailing four-quarter positive average earnings surprise of 28.7%.
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