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CVS Health (CVS) Beats on Q2 Earnings, Raises '19 Guidance

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CVS Health Corporation’s (CVS - Free Report) second-quarter 2019 adjusted earnings per share (EPS) of $1.89 increased 11.8% year over year and also exceeded the Zacks Consensus Estimate by 11.2%. The quarter’s adjusted EPS considered certain transaction and integration costs pertaining to the buyout of Aetna.

On a reported basis, the company registered earnings of $1.49 per share against the year-ago loss of $2.52.

Moreover, total revenues in the second quarter surged 35.2% year over year (after adjusting the interest income on financing the Aetna acquisition, adjusted revenues increased 35.8% year over year) to $63.43 billion. The same also topped the Zacks Consensus Estimate of $62.61 billion by 1.3%.

CVS Health Corporation Price, Consensus and EPS Surprise

CVS Health Corporation Price, Consensus and EPS Surprise

CVS Health Corporation price-consensus-eps-surprise-chart | CVS Health Corporation Quote

The year-over-year revenue rise was primarily driven by the acquisition of Aetna, expanded volume and the brand name drug price inflation in both the Pharmacy Services and Retail/LTC segments, partially offset by a persistent reimbursement pressure in the Retail/LTC, price compression in the Pharmacy Services segment and an increased generic dispensing rate.

Quarter in Detail     

In the second quarter of 2019, the company realigned the composition of its segments. As a result of this move, the company’s SilverScript Medicare Part D prescription drug plan (PDP) was shifted from the Pharmacy Services segment to the Health Care Benefits one. In addition, the mail order and specialty pharmacy operations of Aetna were transitioned from the Health Care Benefits segment to the Pharmacy Services one.

Pharmacy Services revenues inched up 4.2% to $34.84 billion in the reported quarter, driven by growth in total pharmacy claims volume and the brand name drug price inflation. This was, however, partially offset by a continued client price compression and a hiked generic dispensing rate.

Total pharmacy claims processed rose 4% on a 30-day equivalent basis, attributable to net new business and the steady adoption of Maintenance Choice offerings.

Revenues from CVS Health’s Retail/LTC were nudged up 3.7% year over year to $21.45 billion. Per the company, the result was based on higher prescription volume and branded drug price inflation, partially offset by a relentless reimbursement pressure and the impact of recent generic introductions. Front store revenues represented 22.7% of total Retail/LTC revenues in the reported quarter, primarily banking on improved health product sales.

Total prescription volume grew 5.9% on a 30-day equivalent basis, boosted by the steady uptake of patient care programs and collaborations with PBMs as well as the preferred status in a number of Medicare Part D networks.

Within Health Care Benefits segment, the company registered revenues of $17.40 billion in the June quarter.

Gross profit skyrocketed 204% to $24.46 billion. Accordingly, gross margin expanded 2141 bps to 38.6%. Adjusted operating margin in the quarter under review also grew 1911 bps to 25.9% despite 65.2% escalation in operating expenses to $8.04 billion.

Outlook

CVS Health has updated its 2019 guidance.

Adjusted EPS expectation has been raised to the band of $6.89-$7 from the earlier-provided range of $6.75-$6.90. The Zacks Consensus Estimate for earnings is pegged at $6.84, lower than the company’s guided range. This apart, the company’s 2019 adjusted operating profit estimate has been lifted to the $15.2-$15.4 billion band from the previous view of 15-$15.2 billion.

Further, the company has upped its cash flow from operations guidance to $10.1-$10.6 billion from $9.8-$10.3 billion.

The company has also issued view for the third quarter of 2019. Adjusted EPS is projected in the range of $1.75-$1.79. The Zacks Consensus Estimate for earnings of $1.67 remains below the guided range.

Our Take

CVS Health ended the second quarter on a promising note with both earnings and revenues trumping the respective Zacks Consensus Estimate. Moreover, year-over-year growth in the top line was driven by a strong Pharmacy Services segment, benefiting from the upside in specialty services. The company’s recently introduced Health Care Benefits segment following the Aetna acquisition also holds immense promise.

Additionally, solid year-over-year Retail/LTC comparisons were encouraging. The raised EPS projection for 2019 further buoys optimism on the stock. However, the LTC business is facing some industry-wide challenges.

Zacks Rank & Key Picks

CVS Health currently carries a Zacks Rank #3 (Hold). A few better-ranked companies flaunting solid results this earnings season are Stryker Corporation (SYK - Free Report) , Baxter International Inc. (BAX - Free Report) and Intuitive Surgical, Inc. (ISRG - Free Report) .

Stryker delivered second-quarter 2019 adjusted EPS of $1.98, beating the Zacks Consensus Estimate by 2.6%. Revenues of $3.65 billion too exceeded the Zacks Consensus Estimate by 1.4%. The company carries a Zacks Rank of 2.

Baxter delivered second-quarter 2019 adjusted EPS of 89 cents, which surpassed the Zacks Consensus Estimate of 81 cents by 9.9%. Revenues of $2.84 billion also beat the Zacks Consensus Estimate of $2.79 billion by 1.9%. The company holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Intuitive Surgical reported second-quarter 2019 adjusted EPS of $3.25, which beat the Zacks Consensus Estimate of $2.85. Moreover, revenues were $1.1 billion, topping the Zacks Consensus Estimate of $1.03 billion. The company is Zacks #2 Ranked.

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