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CVS Health (CVS) Up 6.3% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for CVS Health (CVS - Free Report) . Shares have added about 6.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is CVS Health due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

CVS Health's PBM Selling Season Remains Solid, Retail Grows

CVS Health 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%.

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.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 5.77% due to these changes.

VGM Scores

Currently, CVS Health has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise CVS Health has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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