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A month has gone by since the last earnings report for CVS Health (CVS). Shares have added about 8.3% 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 catalysts.
CVS Health Q1 Earnings Top Estimates, Gross Margin Drops
CVS Health’s first-quarter 2020 adjusted earnings per share (EPS) of $1.91 increased 17.9% year over year and exceeded the Zacks Consensus Estimate by 17.2%. The adjusted EPS figure takes into account certain integration costs pertaining to the buyout of Aetna, asset amortization costs and storerationalization chargesalong with other adjustments.
On a reported basis, the company’s earnings of $1.53 per share improved 40.4% year over year.
Total revenues in the first quarter rose 8.3% year over year to $66.76 billion. The top line also beat the Zacks Consensus Estimate by 5.6%. The year-over-year revenue rise was primarily driven by strong underlying core growth across all segments.
Quarter in Detail
Pharmacy Services revenues were up 4.2% to $34.98 billion in the reported quarter, driven by growth in specialty pharmacy, brand inflation, increased total pharmacy claims volume, greater use of 90-day prescriptions and early refills of maintenance medications as consumers prepared for the COVID-19 pandemic. The increase was, however, partially offset by continued price compression, an increase in generic dispensing rate and client losses within this business.
Total pharmacy claims processed rose 12.4% on a 30-day equivalent basis, attributable to increased claims under CVS Health’s deal with IngenioRx, and greater use of 90-day prescriptions and early refills of maintenance medications.
Revenues from CVS Health’s Retail/LTC were up 7.7% year over year to $22.75 billion. Per the company, the year-over-year improvement was based on higher prescription volume, increased front store revenuesand branded drug price inflation, partially offset by a persistent reimbursement pressure and the impact of an increased generic dispensing rate. The quarter’s results also benefited from early refills of maintenance medications as well as the impact of the additional day in 2020 due to the leap year. Front store revenues increased 8.5% with an 8% increase in same-store sales.
Prescriptions filled grew 8.2% on a 30-day equivalent basis for the three months ended Mar 31, 2020 compared to the prior-year period, including a 9.8% increase in same-store prescription volume. The growth was primarily driven by the continued adoption of patient care programs, greater use of 90-day prescriptions and early refills of maintenance medications as consumers prepared for COVID-19, and the impact of the additional day in 2020 due to the leap year.
Total prescription volume grew 8.2% on a 30-day equivalent basis with 9.8% rise in same store prescription volume. This wasboosted by the steady uptake of patient care programs, greater use of 90-day prescriptions, early refills of maintenance medication, and the impact of the additional day in 2020 due to the leap year.
Total revenues increased 7.4% for the three months ended Mar 31, 2020 compared with the prior-year quarter, primarily driven by membership growth in the Health Care Benefits segment’s Government products and the favorable impact of the reinstatement of HIF for 2020. These increases were partially offset by the absence of the financial results of Aetna’s standalone Medicare Part D prescription drug plans, which the company retained through 2019, membership declines in the segment’s Commercial insured products, as well as a decline in net investment income due to lower interest rates and capital markets volatility associated with the COVID-19 pandemic.
Within Health Care Benefits segment, the company registered revenues worth $19.19 billion in the first quarter, up 7.4% year over year. The improvement was primarily driven by membership growth in the segment’s government products and the favorable impact of the reinstatement of the health insurance plans for 2020.
Gross profit improved 8.2% to $26.41 billion. However, gross margin contracted 2 bps to 39.6% on 8.3% rise in cost of product sold. Operating margin in the quarter under review grew 82 bps to 5.2% on a 28.6% rise in operating profit to $3.5 billion.
CVS Health reiterated its 2020 adjusted EPS and cash flow guidance.
Adjusted EPS is expected in the band of $7.04-$7.17. The Zacks Consensus Estimate for 2020 earnings is pegged at $7.08.
The full-year operating cash flow guidance in the range of $10.5 billion-$11.0 billion remains unchanged as well.
However, the rest of the earlier-provided guidance has been withdrawn due to the significant variability in the impact of COVID-19 on the company’s business.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review.
At this time, CVS Health has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, 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.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, CVS Health has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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