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CVS Health (CVS): Sluggish Q3, Guidance Cut Pose Concerns

BAX NXTM CVS BVX

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On Nov 18, 2016, we issued an updated research report on Rhode Island-based pharmacy retail giant CVS Health Corp. (CVS - Free Report) , which provides integrated offerings across the entire spectrum of pharmacy care.

CVS Health posted mixed third-quarter 2016 results, with adjusted EPS beating the Zacks Consensus Estimate while revenues missed the mark. The company also anticipates continued margin declines related to both reimbursement pressures and the mix of business. According to management, the recent network changes have made it more difficult to grow share and thereby, offset the ongoing margin pressures in the near term. Hence, 2017 will be a challenging year on the margin front.

It is also disappointing to see the trimmed guidance, which indicates no immediate chance of recovery. The company has lowered its full-year 2016 earnings expectations. It currently expects adjusted EPS in the range of $5.77–$5.83 (earlier expectation was $5.81–$5.89). The current Zacks Consensus Estimate for earnings is pegged at $5.86 per share for 2016, above the projected range.

Nonetheless, year-over-year growth remained impressive in the third quarter, with the Pharmacy Services segment reaping benefit from growth in the Specialty Pharmacy business while the Retail Pharmacy segment gained from increased same-store sales. CVS Health also expects to benefit from the recently acquired Omnicare and Target in both the near and long term. Additionally, it anticipates market share gain in the specialty pharmacy suite of services with differentiated specialty offerings providing a high level of clinical support to patients.

Meanwhile, according to recent data, 3 million people in the U.S. are currently in need of specialty treatment and the potential cost for this tends to be very high. With management emphasizing that CVS Health's specialty business remains a top priority for customers, we believe it is well positioned to tap this opportunity based on its broad, differentiated offerings, including the likes of Specialty Connect.

However, given the highly competitive retail pharmacy business, shareholders of CVS Health anticipate severe threat from the $17.2 billion mega merger between Walgreens and Rite Aid, once the deal closes. Also, the sluggish economic conditions in the U.S. might hamper the company's profit margin.

The stock currently holds a Zacks Rank #5 (Strong Sell).

Key Picks

Better-ranked medical stocks are Nxstage Medical Inc. (NXTM - Free Report) , Baxter International Inc. (BAX - Free Report) and Bovie Medical Corporation (BVX - Free Report) . Nxstage Medical and Baxter 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 surged 31.6% over the last one year compared to the S&P 500’s 5.1% over the same period. The company has a four-quarter average positive earnings surprise of 50.00%.

Baxter International rallied 20.9% in the past one year, much higher than the S&P 500’s 5.1%. It has a trailing four-quarter average positive earnings surprise of 27%.

Bovie Medical recorded a 126.5% gain in the past one year, way better than the S&P 500’s 5.1%. The company has a trailing four-quarter average positive earnings surprise of 28.7%.

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