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Will CVS Health's (CVS) Earnings Surprise this Season?

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CVS Health Corporation (CVS - Free Report) – formerly known as CVS Caremark – is scheduled to report its fourth-quarter and full year 2014 results before the opening bell on Feb 10. Last quarter, the company had posted a positive earnings surprise of 0.88% while the four-quarter trailing average beat is pegged at 0.41%. Let’s see how things are shaping up prior to this announcement.

Factors at Play

Barring an unimpressive first quarter of 2014, CVS Health delivered two successive quarters of earnings and revenue beat in 2014. However, this being the first quarter that will see the full financial effect of the company’s decision to exit the tobacco category, CVS expects profit growth in the fourth quarter to be somewhat lower than the sequentially previous numbers.

However, we are encouraged that based on 15 successful selling seasons; the company has invested incrementally in the next season to ensure a successful migration of new customers.

Over the quarters, the Pharmacy Services segment has been positively impacted by growth in specialty pharmacy and favorable purchasing economics while the Retail Pharmacy segment has benefited from increased sales and an improved margin rate, partially offset by incremental store operating costs associated with operating more number of stores.

In the fourth quarter, within the retail segment, CVS expects revenues to be up 0.25% to 1.75% year over year. Adjusted script comps are expected to increase in the range of 3.5% to 4.5% while total same store sales growth are projected to remain in the range of negative 1% to positive 0.5%. The company expects front store same store sales to reflect a negative impact of approximately 900 basis points relative to the tobacco exit in the fourth quarter.

On the bright side, the company expects expansion in retail gross margins in the fourth quarter driven by better purchasing economics which includes the quarterly payment from Cardinal Health as well as the exit from the tobacco business.

In the PBM segment, the company expects revenues to increase 16.75% to 18.25% with adjusted claims to remain between 270 million and 275 million. However, the company expects a significant decline in PBM gross margins during the fourth quarter due to price compression and drug mix.

Earnings Whispers?

Our proven model does not conclusively show that CVS Health is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is, however, not the case here as you will see below.

Zacks ESP: CVS Health’s earnings ESP is 0.00%, as both the Most Accurate estimate and the Zacks Consensus Estimate stand at $1.21.

Zacks Rank: CVS Caremark has a Zacks Rank #2 (Buy) which increases the predictive power of ESP. However, a 0.00% ESP makes surprise prediction difficult.

Note that we caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks that Warrant a Look

Here are three companies you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:  

ACADIA Pharmaceuticals Inc. (ACAD - Free Report) has an earnings ESP of +3.85% and holds a Zacks Rank #2. ACADIA is expected to report fourth-quarter 2014 earnings on Feb 26.

Actavis plc (ACT - Free Report) has an earnings ESP of +4.38% and carries a Zacks Rank #2. Actavis is scheduled to report fourth-quarter earnings on Feb 18.

DexCom, Inc. (DXCM - Free Report) has an earnings ESP of +100% and retains a Zacks Rank #3 (Hold). DexCom is expected to report fourth-quarter earnings on Feb 19.

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