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Factors Setting Stage for CVS Health's (CVS) Q1 Earnings

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CVS Health (CVS - Free Report) is scheduled to report first-quarter 2018 results on May 2, before the opening bell. In the last reported quarter, the company delivered a positive earnings surprise of 1.6%. Its trailing four-quarter average positive earnings surprise is 2.5%.

Let’s take a look at how things are shaping up prior to this announcement.

Factors at Play

CVS Health has so far progressed well with its 2018 PBM selling season. Per the last-reported numbers, gross new business wins totaled $6.2 billion while net new business wins grossed $2.4 billion along with an impressive client retention rate. This momentum is expected to continue in the to-be-reported quarter.

Despite tough pricing competition, CVS health is currently gaining on high level of service and execution, competitive pricing along with unique integrated model.

The company is also upbeat about sustaining the solid year-over-year earnings trend in the first quarter of 2018 on gains to be realized from the Pharmacy Services segment. The performance is being driven by higher specialty pharmacy and pharmacy network claim volumes as well as brand inflation.

Management stated that CVS Health’s specialty business is its top priority to help the company expand its customer base. CVS Health is poised to capitalize on this opportunity on the back of wide and differentiated offerings, including Specialty Connect.

CVS Health Corporation Price and EPS Surprise

Further, the company expects drug price inflation, product launches and higher utilization to fuel growth. We expect the Pharmacy Services segment to be a stable growth platform.

CVS Health also projects better-than-expected performance in the to-be-reported quarter primarily on the back ofscript utilization at retail. The company has projected a 1.5-3.25% rise in consolidated net revenues for the first quarter.

Further, a strong flu season has led to the improved outlook. Overall, for the first quarter of 2018, the company expects to register adjusted operating profit growth in the range of 0.5% to 4.5%. The Zacks Consensus Estimate for total revenues of $45.82 billion reflects a 2.9% increase year over year.

Although CVS Health’s Retail/LTC business registered revenue growth after several quarters of a slump in the last reported quarter, there are multiple factors raising concerns. Firstly, the year-over-year growth was just a marginal 0.3%.

Further, continued reimbursement pressure, increasing generic dispensing rate andrecent generic drug introductions have been affecting the business. This apart, marketplace changes that kept CVS Pharmacy from participating in certain networks had a 320-basis point negative impact on same-store prescription volumes in the previously reported quarter.

However, CVS Health has been striving to return to growth in the Retail/LTC business. Management claims that the company is focused on working with all payers to drive volumes and capture market share. CVS Health is also poised to gain from programs such as Health Tag and ExtraCare Health Card.

The company also expects to witness revenue growth of 4% to 5.5% and operating profit growth in the low to mid-single digits range, within the Retail/LTC business.

Here is What Our Quantitative Model Predicts:

Our proven model does not conclusively show that CVS Health will beat estimates this earnings season. This is because a stock needs to have both a positive Earnings ESP and a solid Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here, as you will see below.

Zacks ESP:  CVS Health has an Earnings ESP of +1.94%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: CVS Health carries a Zacks Rank #4 (Sell).

Please note that stocks with a Zacks Rank #4 or 5 (Strong Sell) should never be considered going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Meanwhile, the Zacks Consensus Estimate for first-quarter adjusted EPS of $1.40 reflects a 19.7% increase year over year.

Stocks to Consider

Here are a few medical stocks worth considering with the right combination of elements to beat estimates this time around:

Laboratory Corporation of America Holdings (LH - Free Report) has an Earnings ESP of +1.52% and a Zacks Rank #2.

Henry Schein, Inc. (HSIC - Free Report) has an Earnings ESP of +2.53% and a Zacks Rank #3.

Align Technology, Inc. (ALGN - Free Report) has an Earnings ESP of +2.96% and is a Zacks #3 Ranked player.

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