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CVS Health's (CVS) Q2 Earnings Beat Estimate, Margins Up

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CVS Health Corporation’s (CVS - Free Report) second-quarter 2018 adjusted earnings per share (EPS) of $1.69 surged 27.1% year over year and exceeded the Zacks Consensus Estimate of $1.61. The quarter’s adjusted EPS considered an additional adjustment of goodwill impairment charge related to the Long-term Care (LTC) business.

On a reported basis, the company incurred loss of $2.52 from continuing operations in the quarter, as compared to EPS of $1.07 in the year-ago period.

Net revenues in the second quarter increased 2.4% year over year to $46.71 billion. This surpassed the Zacks Consensus Estimate by 0.7%.

Quarter in Details

Pharmacy Services revenues increased 2.8% to $33.2 billion in the reported quarter, driven by growth in pharmacy network and mail choice claim volume as well as brand inflation. This was, however, partially offset by increased generic dispensing and continued price compression.

Pharmacy network claims processed during the quarter climbed 5.9% to 398.2 million on a 30-day equivalent basis, backed by net new business growth. Also, the Mail Choice claim processed count was 70.9 million, up 9.5% on a 30-day equivalent basis on continued adoption of Maintenance Choice offerings.

CVS Health Corporation Price, Consensus and EPS Surprise

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

Revenues from CVS Health’s Retail/LTC were up by 5.7% year over year to $20.7 billion. According to the company, a 9.5% increase in same store prescriptions on a 30-day equivalent basis, continued adoption of Patient Care Programs, alliances with PBMs and health plans, inclusion in a number of additional Medicare Part D networks and brand inflation were partially offset by continued reimbursement pressure and the impact of recent generic introductions.

Front-end same-store sales dropped 1% year over year driven by a 90 basis points unfavorable impact of the shift of sales associated with the Easter holiday from the second quarter of 2017 to the first quarter of 2018, as well as softer customer traffic. However, this was partially offset by an increase in basket size.

Pharmacy same-store sales increased 8.3% in the reported quarter driven by the increase in pharmacy same store prescription volumes, partially offset by continued reimbursement pressure and a negative impact of approximately 275 basis points due to recent generic introductions.

The generic dispensing rate (the proportion of all generic prescriptions to total number of prescriptions dispensed) increased approximately 40 bps to 87.6% at the Pharmacy Services segment and around 45 bps to 88.1% at the Retail/LTC segment.

Gross profit improved 3.9% to $7.2 billion. Accordingly, gross margin expanded 26 bps to 15.4%. Adjusted operating margin in the quarter improved 7 bps to 4.9%.

CVS Health exited the second-quarter 2018 with cash and cash equivalents and short-term investments of $43.9 billion compared with $42.1 billion at the end of the first quarter. Year-to-date, net cash provided by operating activities was $5.3 billion, as compared to $5.5 billion a year ago.

Outlook

We note that, according to an interim goodwill impairment test that was performed as of June 30, 2018, the fair value of the LTC business has come lower than the carrying value resulting in a $3.9 billion noncash pre-tax and after-tax goodwill impairment charge. In order to reflect this charge, the company has updated its full-year 2018 financial guidance.

Reported EPS from continuing operations is now expected in the band of $1.40 to $1.50, a massive decline from $5.11 to $5.32 earlier.

CVS Health currently expects to deliver full-year 2018 adjusted EPS in the band of $6.98 to $7.08 as compared to the earlier band of $6.87 to $7.08. Also, it has updated its 2018 adjusted operating profit growth guidance in the range of (0.75%) to up 0.75% from earlier prediction of (1.5%) to 1.5%.

The company has also provided guidance for third quarter 2018. CVS Health expects to deliver adjusted EPS in the range of $1.68 to $1.78. This apart, adjusted operating profit is expected to decline in the range of 2.5% to 5%.

Our Take

CVS Health ended the second quarter of 2018 on promising note with earnings and revenues both ahead of the respective Zacks Consensus Estimate. However, the year-over-year growth in the top line was driven by a strong Pharmacy Services segment, benefiting from the upside in the specialty services. Also, strong year-over-year Retail/LTC comparisons were encouraging. The company currently is moving forward towards the completion of the Aetna deal.

Zacks Rank & Key Picks

CVS Health currently carries a Zacks Rank #2 (Buy). A few top-ranked stocks in the broader medical sector, which reported solid results this earnings season, are Intuitive Surgical (ISRG - Free Report) , Chemed Corporation (CHE - Free Report) and Align Technology, Inc. (ALGN - Free Report) . While Intuitive Surgical sports a Zacks Rank #1 (Strong Buy), Chemed and Align Technology carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Intuitive Surgical reported second-quarter 2018 adjusted earnings per share (EPS) of $2.76, beating the Zacks Consensus Estimate of $2.48. Revenues totaled $909.3 million, also surpassing the consensus estimate of $870 million.

Chemed reported second-quarter 2018 adjusted EPS of $2.81, which topped the Zacks Consensus Estimate of $2.68. Revenues of $441.8 million edged past the Zacks Consensus Estimate of $432.3 million.

Align Technology posted second-quarter 2018 adjusted EPS of $1.30, steering past the Zacks Consensus Estimate of $1.09. Revenues came in at $490.3 million, outpacing the consensus mark of $462.9 million.

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