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Here's Why You Should Hold on to CVS Health (CVS) For Now

Zacks Equity Research

CVS Health CVS has been gaining from successful execution of several sales building efforts, including new business wins and high customer retention. However, a challenging reimbursement scenario and a tough competitive landscape are some downsides.

Shares of this company have declined 8.8% in a year’s time compared with the industry’s 15.8% drop. However, it has underperformed the S&P 500 index, which has returned 12.4% during the same time period.

This renowned pharmacy innovation company has a market cap of $94.12 billion. With an expected five-year growth projection rate of 6.6% and a trailing four-quarter average positive earnings surprise of 6.6%, CVS Health seems to be a stock that investors should retain in their portfolio for now.

Let’s delve deeper into the factors that substantiate its Zacks Rank #3 (Hold).

Strong Momentum in PBM Business: In the third quarter of 2019, adjusted claims volumes increased 9.3%, year on year, driven by net new business wins. According to CVS Health, service levels and performance metrics are currently at historically high levels and the company expects to return to its historical retention levels in future periods.

 

Health Care Benefit Shows Potential: Following the $70-billion acquisition of health insurance giant, Aetna, CVS Health has introduced a business arm called Health Care Benefit. This segment has started to pick up momentum, particularly in government business. In the recently-reported quarter, revenues exceeded the company’s expectations on strong growth in Medicare products. This growth trajectory is expected to be maintained through the rest of 2019.

Retail on Growth Track: Over the last few quarters, the Retail Long-Term Care business registered revenue growth after several quarters of a drag. This year-over-year growth was 2.9% in the third quarter, in line with the company's expectation, primarily driven by increased prescription volume and drug price inflation.

However, there are a few factors which have been deterring growth.

Risk Related to Reimbursement Reduction: A significant portion of CVS Health’s net revenues is derived directly from Medicare, Medicaid and other government-sponsored health care programs. The company is, therefore, subject to federal and state reimbursement laws and regulatory requirements, anti-remuneration laws, the Stark Law and/or federal and state false claims laws.

Competitive Landscape: Despite significant new client wins in the course of a strong selling season, intense competition and tough industry conditions act as major impediments. Major competitors such as Walgreens, Target and Wal-Mart are expanding their pharmacy businesses. Competition is especially tough in the pharmacy segment, as other retail businesses continue to add pharmacy departments and low-cost pharmacy options become available.

Which Way Are Estimates Headed?

For 2019, the Zacks Consensus Estimate for revenues is pegged at $252.9 billion, indicating an improvement of 30.3% from the year-ago period. For adjusted earnings per share (EPS), the same is pinned at $7, suggesting 1.1% growth from the year-ago reported figure.

For the fourth quarter, the Zacks Consensus Estimate for revenues is pinned at $64.5 billion, calling for year-over-year growth of 18.5%. The same for adjusted EPS stands at $1.70, suggesting a fall of 20.6% year over year.

Key Picks    

Some better-ranked stocks from the broader medical space are Haemonetics Corporation HAE, NuVasive, Inc NUVA and GW Pharmaceuticals plc GWPH, each carrying a Zacks Rank #2 (Buy).

Haemonetics, has a projected long-term earnings growth rate of 13.5%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

NuVasive, has an expected long-term earnings growth rate of 10.9%.

GW Pharmaceuticals estimates fourth-quarter earnings growth rate to be 67.9%.

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