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Why Is CVS Health (CVS) Down 7.9% Since Last Earnings Report?

Zacks Equity Research
D.R. Horton (DHI) reported earnings 30 days ago. What's next for the stock? We take a look at earnings estimates for some clues.

A month has gone by since the last earnings report for CVS Health (CVS). Shares have lost about 7.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is CVS Health due for a breakout? 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's PBM Selling Season Remains Solid, Retail Grows

CVS Health Corporation’s fourth-quarter 2018 adjusted earnings per share (EPS) of $2.14 surged 11.5% year over year and exceeded the Zacks Consensus Estimate by 3.4%. The quarter’s adjusted EPS considered certain transaction and integration costs related to the recently-closed acquisition of Aetna and the purchase of Omnicare. It also adjusted certain goodwill impairment related to the LTC reporting unit.

On a reported basis, the company registered loss of 37 cents per share as compared to the year-ago EPS of $3.22.

Full-year adjusted EPS was $7.08, a 20% rise from the year-ago period. This also exceeded the Zacks Consensus Estimate of $6.98.

Net revenues in the fourth quarter increased 12.5% year over year to $54.42 billion. This surpassed the Zacks Consensus Estimate by 1.3%.

The company registered revenues of $194.58 billion in 2018, a 5.3% improvement from the year-ago period. This exceeds the Zacks Consensus Estimate of $193.13 billion.

Quarter in Details
                                
Pharmacy Services revenues increased 2.2% to $34.09 billion in the reported quarter, driven by growth in total pharmacy claims volume. This was, however, partially offset by continued client price compression.

Total pharmacy claims processed increased 5.6% on a 30-day equivalent basis driven by net new business and the continued adoption of Maintenance Choice offerings.

Revenues from CVS Health’s Retail/LTC were up by 5.4% year over year to $22.03 billion. According to the company, the result was based on increased prescription volume and branded drug price inflation, partially offset by continued reimbursement pressure and the impact of recent generic introductions. Front store revenues increased in the reported quarter primarily banking on improvement in health product sales.

Total prescription volume grew 8.6% driven by the continued adoption of patient care programs and collaborations with PBMs as well as preferred status in a number of Medicare Part D networks during 2018.

LTC business in the quarter however, was facing industry wide challenges like lower occupancy rates in skilled nursing facilities, significant deterioration in the financial health of numerous skilled nursing facility customers which resulted in a number of customer bankruptcies in 2018. These have adversely affected the company’s ability to grow the business at the rate that was originally estimated when the company acquired Omnicare.

Following the closing of CVS Health’s acquisition of Aetna, the company has integrated Aetna’s Health Care segment to its business and renamed it as Health Care Benefits segment. In the reported quarter, the company registered revenues of $5.55 billion within this segment.

Gross profit improved 67.1% to $13.9 billion. Accordingly, gross margin expanded 833 bps to 25.5%. Adjusted operating margin in the quarter expanded 597 bps to 13.3%.

Outlook

CVS Health has provided its 2019 guidance.

Adjusted EPS is expected in the band of $6.68 to $6.88. The Zacks Consensus Estimate for earnings is pegged at $7.38 per share, outside the company’s guided range. This apart, its 2019 adjusted operating profit guidance remains in the range $14.8 billion to $15.2 billion.

Further, the company expects cash flow from operations in the band of $9.8 billion to $10.3 billion.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -8.54% due to these changes.

VGM Scores

At this time, CVS Health has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, 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 aggregate VGM Score of B. 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. It's no surprise CVS Health has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.



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