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CVS Health (CVS) Q1 Earnings Beat Estimates, Decrease Y/Y

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CVS Health Corporation (CVS - Free Report) reported first-quarter 2017 adjusted earnings per share (EPS) of $1.17, down 0.8% year over year. However, the quarter‘s adjusted EPS exceeded the Zacks Consensus Estimate of $1.10 by 6.4%.

Earnings performance was dull year over year on disappointing Retail/LTC numbers as well as dismal margin show.

Without the one-time adjustments, reported EPS from continuing operations in the first quarter plummeted 11.5% year over year to 92 cents.

Net revenue in the quarter increased 2.9% year over year to $44.5 billion and exceeded the Zacks Consensus Estimate of $44.2 billion by a close margin. Strong revenue growth in Pharmacy Services segment was offset by a decline in Retail/LTC performance which pulled down the quarter’s overall top-line growth.

CVS Health Corporation Price, Consensus and EPS Surprise

 

CVS Health Corporation Price, Consensus and EPS Surprise | CVS Health Corporation Quote

Quarter in Details

Pharmacy Services revenues increased 8.5% to $31.2 billion in the reported quarter on growth in the specialty pharmacy business, higher pharmacy network claim volume as well as brand inflation, partially offset by increased generic dispensing and price compression.

Pharmacy network claims processed during the quarter went up 10.5% to 376.8 million on a 30-day equivalent basis, backed by net new business growth. Moreover, the Mail Choice processed claim count was 63.7 million, up 4.5% on a 30-day equivalent basis as the continued adoption of Maintenance Choice offerings and increase in specialty pharmacy claims were partially offset by a decline in traditional mail volume.

Revenues from CVS Health’s Retail/LTC declined 3.8% year over year to $19.3 billion, primarily due to a 4.7% decrease in same store sales, continued reimbursement pressure and an increase in the generic dispensing rate.

Front-end same-store sales were down 4.9% year over year. Front-end same-store sales were negatively impacted by 100 basis points (bps) due to the absence of leap day this year compared with the prior year. The shift of the Easter holiday to the second-quarter 2017 from the first-quarter 2016 had a 75 bps negative impact. Front store sales were also negatively impacted by soft customer traffic, efforts to rationalize promotional strategies, which were partially offset by an increase in basket size.

Pharmacy same-store sales also declined 4.7% in the reported quarter. Sales were affected approximately 480 bps due to recent generic drug introductions. Moreover, Pharmacy same-store prescription volumes dropped 1.4% on a 30-day equivalent basis. This apart, marketplace changes that restricted CVS Pharmacy from participating in certain networks had a 460 bps negative impact on same store prescription volumes. Also, the absence of leap day as mentioned earlier in the reported quarter had an approximately 120 bps negative impact on same store prescription volumes.

The generic dispensing rate (the proportion of all generic prescriptions to total number of prescriptions dispensed) soared 140 bps to 87% at the Pharmacy Services segment and 180 bps to 87.5% at the Retail/LTC segment.

While gross profit dropped 2.4% to $6.6 billion, gross margin contracted 82 bps to 14.8%. Total operating margin during the quarter contracted 103 bps to 4% on a 17.9% plunge in operating profit.

CVS Health exited the quarter with cash and cash equivalents and short-term investments of $2.3 billion compared with $3.45 billion at the end of 2016. Net cash provided by operating activities was $3.5 billion in the first quarter, up 45.8% from the year-ago period.

During the first quarter, CVS Health opened 27 new retail stores and closed 60. Further, the company relocated 10 retail stores. As of Mar 31, 2017, CVS Health operated 9,676 retail stores, including pharmacies in Target stores across 49 U.S. states, as well as the District of Columbia, Puerto Rico and Brazil.

2017 Outlook

Despite a dull bottom-line show, the company reaffirmed its earlier declared full-year 2017 adjusted EPS and cash flow guidance. Adjusted earnings are expected in the band of $5.77–$5.93. The Zacks Consensus Estimate of $5.86 is within the guided range. Full-year operating cash flow is expected in the range of $7.7–$8.6 billion and free cash flow in the range of $6.0–$6.4 billion.

Our Take

CVS Health posted mixed first-quarter results with adjusted EPS beating the Zacks Consensus Estimate but declining year over year. Slower revenue performance on poor Retail/LTC numbers as well as margin debacle resulted in such a dull earnings performance by the company in the quarter.

Nonetheless, year-over-year growth in the top line was due to strong Pharmacy Services segment that benefited from the upside in the Specialty Pharmacy. We are also encouraged to note that, despite a soft bottom-line scenario, the company reiterated its earnings outlook for 2017 indicating chances of recovery ahead.

Zacks Rank & Key Picks

CVS Health currently has a Zacks Rank #3 (Hold). Some better-ranked medical stocks are Hologic, Inc. (HOLX - Free Report) , Heska Corporation and Progenics Pharmaceuticals, Inc. . All three stocks sport a Zacks Rank 1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Hologic gained 32.82% in the last one year compared with the S&P 500’s 14.53% growth. The company delivered a four-quarter average earnings surprise of over 4.16%.

Heska surged over 263.75% in the last one year compared with the S&P 500’s gain. It posted a four-quarter average positive earnings surprise of 291.54%.

Progenics Pharmaceuticals gained 45.14% in the past one year, better than the S&P 500 mark. It reported a four-quarter average positive earnings surprise of 8.45%.

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