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CVS Stock Jumps 7% After Strong Earnings: What's Next for the Pharmacy Giant?

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CVS (CVS - Free Report) reported its Q2 earnings results Wednesday morning and beat our estimates by 11%. Shares of CVS then surged 7% in a one-day climb that help make the firm’s 2019 performance appear slightly better.

Even after the major jump, CVS is still down 10% YTD. But CVS stock has outperformed the broader retail drug store market. CVS continued the positive run on Thursday, gaining over 1% through morning trading.

Overview and Q2 Performance

Headquartered in Rhode Island, CVS is a retail pharmacy and a pharmacy benefit manager. CVS is currently ranked 7th on the Fortune 500, with revenue of $194 billion in 2018.

Total revenue in Q2 was $63.431 billion, a 35% increase from Q2 2018. However, much of the revenue growth was driven by its $70 billion Aetna acquisition that was completed in November 2018. Revenue from the company’s Health Care Benefits segment increased from $764 million to $17.4 billion. It was dramatic increases like this, fueled by the Aetna acquisition, that allowed CVS to grow its revenue by such a large percentage.

Same store sales jumped 4.2% from the year-earlier period. Both CVS’ pharmacy section and front store unit posted the same comparable sales growth. The company did note that front store sales numbers were favorably impacted by Easter falling later in April.

Meanwhile, adjusted EPS for the quarter came in at $1.89, $0.19 above our estimate. The year-over-year increase of $0.20 represented 11.8% growth. According to CVS, the strong quarter was a result of Retail/LTC and Pharmacy Services exceeding expectations, along with strong revenue and market share growth.

Outlook

Our Zacks Consensus Estimates call for Q3 revenue of $63.17 billion, which would mark 33.64% expansion. As was the case with this quarter, though, Aetna was not a part of CVS during Q3 2018, which makes the growth estimate slightly misleading. Plus, our Key Company Metrics expect year-over-year growth across all segments for the upcoming quarter.

On top of that, our estimates call for fiscal 2019 revenue of $252.60 billion, which would represent 30.14% growth from 2018. With that said, a more accurate growth estimate would be fiscal 2020. Currently analysts expect fiscal 2020 revenue of $256.98 billion, which would represent 1.73% growth from this year’s current estimate.

CVS increased its guidance for full-year 2019’s adjusted EPS to $6.89-$7.00, up from $6.75-$6.90. Company executives cited outperformance and increased synergy expectations. Last year, adjusted EPS came in at $7.08, so it does appear the company expects an overall decrease in earnings. However, CVS plans to slowly increase its earnings growth, with company executives hoping for double-digit expansion by 2022.

It is important to note that our estimates have not been updated since the positive results were released on Wednesday morning, though they should be updated soon.

Bottom Line

CVS has successfully transitioned toward a more health focused concept. The Aetna acquisition has been extremely beneficial and will likely continue to boost the company’s performance for years to come.

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