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CVS Health (CVS) Beats on Q3 Earnings, Raises '19 EPS Guidance

Zacks Equity Research

CVS Health Corporation’s CVS third-quarter 2019 adjusted earnings per share (EPS) of $1.84 increased 6.4% year over year and also exceeded the Zacks Consensus Estimate by 3.9%. The quarter’s adjusted EPS considered certain transaction and integration costs pertaining to the buyout of Aetna and store rationalization charges along with other adjustments.

On a reported basis, the company registered earnings of $1.17 per share, reflecting a 13.9% drop from the year-ago period.

Moreover, total revenues in the third quarter surged 36.5% year over year (after adjusting the interest income on financing the Aetna acquisition, adjusted revenues increased 37.1% year over year) to $64.81 billion. The same also topped the Zacks Consensus Estimate by 2.8%.

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     

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

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

Pharmacy Services revenues were up 6.4% to $36 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 an increase in generic dispensing rate.

Total pharmacy claims processed rose 9.3% 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 up 2.9% year over year to $21.47 billion. Per the company, the result was based on higher prescription volume and branded drug price inflation, partially offset by a persistent reimbursement pressure and the impact of an increased generic dispensing rate. Front store revenues represented 21.5% of total Retail/LTC revenues in the reported quarter, primarily banking on improved sales of health and beauty products, which benefited from consistent strength in cough and cold products.

Total prescription volume grew 6.4% on a 30-day equivalent basis, boosted by the steady uptake of patient care programs.

Within Health Care Benefits segment, the company registered revenues worth $16.5 billion in the third quarter.

Gross profit soared 52.6% to $11.52 billion. Accordingly, gross margin expanded 188 bps to 17.8%. However, operating margin in the quarter under review contracted 90 bps to 4.5% despite a 13.7% rise in operating profit to $2.93 billion.

Outlook

CVS Health has updated its 2019 guidance.

Adjusted EPS expectation is raised to the band of $6.97-$7.05 from the earlier-provided range of $6.89-$7. The Zacks Consensus Estimate for current-year earnings is pegged at $6.98, within the company’s guided range.

This apart, the company’s 2019 adjusted operating profit estimate is lifted to the $15.22-$15.40 billion band from the previous view of 15.16-$15.36 billion.

Further, the company reaffirmed its cash flow from operations guidance at $10.1-$10.6 billion.

Our Take

CVS Health ended the third 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, which benefited 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 upped adjusted EPS projection for 2019 further buoys optimism on the stock. However, the LTC business is facing some industry-wide challenges.

Earnings of Other MedTech Majors at a Glance

CVS Health carries a Zacks Rank #3 (Hold). Some better-ranked companies, which posted solid results this earnings season, are Edwards Lifesciences EW, Thermo Fisher Scientific TMO and ResMed RMD, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Edwards Lifesciences delivered third-quarter 2019 adjusted EPS of $1.41, outpacing the Zacks Consensus Estimate by 15.6%. Net sales of $1.09 billion also surpassed the Zacks Consensus Estimate by 5.5%.

Thermo Fisher delivered third-quarter 2019 adjusted EPS of $2.94, which surpassed the Zacks Consensus Estimate by 2.1%. Revenues of $6.27 billion too outshined the consensus estimate by 1.3%.

ResMed reported first-quarter fiscal 2020 adjusted EPS of 93 cents, which beat the Zacks Consensus Estimate of 87 cents by 6.9%. Additionally, revenues of $681.1 million trumped the Zacks Consensus Estimate by 3.6%.

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