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CVS Health's (CVS) Q4 Earnings Top Estimates, Margins Up

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CVS Health Corporation’s (CVS - Free Report) fourth-quarter 2018 adjusted earnings per share (EPS) of $2.14 surged 11.5% year over year and exceeded the Zacks Consensus Estimate by 3.4%. The quarter’s adjusted EPS considered certain transaction and integration costs related to the recently-closed acquisition of Aetna and the purchase of Omnicare. It also adjusted certain goodwill impairment related to the LTC reporting unit.

On a reported basis, the company registered loss of 37 cents per share as compared to the year-ago EPS of $3.22.

Full-year adjusted EPS was $7.08, a 20% rise from the year-ago period. This also exceeded the Zacks Consensus Estimate of $6.98.

Net revenues in the fourth quarter increased 12.5% year over year to $54.42 billion. This surpassed the Zacks Consensus Estimate by 1.3%.

The company registered revenues of $194.58 billion in 2018, a 5.3% improvement from the year-ago period. This exceeds the Zacks Consensus Estimate of $193.13 billion.

Quarter in Details                               

Pharmacy Services revenues increased 2.2% to $34.09 billion in the reported quarter, driven by growth in total pharmacy claims volume. This was, however, partially offset by continued client price compression.

Total pharmacy claims processed increased 5.6% on a 30-day equivalent basis driven by net new business and the 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 5.4% year over year to $22.03 billion. According to the company, the result was based on increased prescription volume and branded drug price inflation, partially offset by continued reimbursement pressure and the impact of recent generic introductions. Front store revenues increased in the reported quarter primarily banking on improvement in health product sales.

Total prescription volume grew 8.6% driven by the continued adoption of patient care programs and collaborations with PBMs as well as preferred status in a number of Medicare Part D networks during 2018.

LTC business in the quarter however, was facing industry wide challenges like lower occupancy rates in skilled nursing facilities, significant deterioration in the financial health of numerous skilled nursing facility customers which resulted in a number of customer bankruptcies in 2018. These have adversely affected the company’s ability to grow the business at the rate that was originally estimated when the company acquired Omnicare.

Following the closing of CVS Health’s acquisition of Aetna, the company has integrated Aetna’s Health Care segment to its business and renamed it as Health Care Benefits segment. In the reported quarter, the company registered revenues of $5.55 billion within this segment.

Gross profit improved 67.1% to $13.9 billion. Accordingly, gross margin expanded 833 bps to 25.5%. Adjusted operating margin in the quarter expanded 597 bps to 13.3%.


CVS Health has provided its 2019 guidance.

Adjusted EPS is expected in the band of $6.68 to $6.88. The Zacks Consensus Estimate for earnings is pegged at $7.38 per share, outside the company’s guided range. This apart, its 2019 adjusted operating profit guidance remains in the range $14.8 billion to $15.2 billion.

Further, the company expects cash flow from operations in the band of $9.8 billion to $10.3 billion.

Our Take

CVS Health ended the year 2018 on promising note with fourth-quarter earnings and revenues both ahead of the respective Zacks Consensus Estimate. 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. The company’s recently introduced Health Care Benefits segment following the Aetna acquisition holds immense promise.

Also, strong year-over-year Retail/LTC comparisons were encouraging. However, the LTC business is facing industry-wide challenges. The EPS projection for the full-year 2019 currently looks lackluster.

Zacks Rank & Key Picks

CVS Health currently carries a Zacks Rank #3 (Hold).

A few better-ranked medical stocks are Abbott Laboratories (ABT - Free Report) , AngioDynamics Inc. (ANGO - Free Report) and CONMED, Corp. (CNMD - Free Report) . You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Abbott reported fourth-quarter 2018 adjusted EPS of 81 cents, in line with the Zacks Consensus Estimate. Revenues of $7.77 billion were below the Zacks Consensus Estimate of $7.79 billion. The stock has a Zacks Rank #2 (Buy).

AngioDynamics’ fiscal second-quarter adjusted EPS of 22 cents exceeded the Zacks Consensus Estimate by a penny. Revenues totaled $91.5 million, beating the consensus estimate by 2.9%. The stock sports a Zacks Rank #1.

CONMED delivered fourth-quarter adjusted EPS of 73 cents, in line with the Zacks Consensus Estimate. Revenues of $242.4 million beat the Zacks Consensus Estimate of $229.2 million. The stock carries a Zacks Rank of 2.

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