Personal Finance

5 Things CVS Health's Management Just Said That You'll Want to Know

Woman listening with hand to ear

Another quarterly update has come and gone for CVS Health (NYSE: CVS) . Although the pharmacy company topped consensus analysts' estimates, there wasn't much for investors to get excited about with the third-quarter numbers . CVS Health stock's movement reflected this, with shares dropping more than 3.5% on Monday after the company announced its results.

More interesting than the numbers themselves, though, was what CVS Health's management team said during the company's quarterly conference call . Here are five things said during the call that you'll want to know.

Woman listening with hand to ear

Image source: Getty Images.

1. Signs of improvement in retail

Although CVS Health's retail/long-term care (LTC) segment posted a 2.7% year-over-year sales decline in the third quarter, there were some signs that things are improving. The company's CFO, David Denton, said that, excluding the impact of three major hurricanes that hit the southern U.S. and Puerto Rico, retail/LTC segment profit was within the company's expectations.

Also, while front-store sales were down, front-store gross margin increased from the prior-year period. CEO Larry Merlo attributed this improvement to three key factors. Merlo said that "personalization and promotional strategies have been successfully contributing to growth in front-store profitability." The third factor he mentioned that is helping increase front-store profit margin is growth in store brands. Merlo noted that store brands generated 23.2% of front-store sales in the third quarter and "remains an area of strength and opportunity."

2. The "Amazon strategy"

Merlo outlined a new home-delivery program that analysts immediately recognized as a strategy to compete against the anticipated threat posed by Amazon (NASDAQ: AMZN) . Beginning in 2018, CVS Health will offer next-day delivery from all of its stores. In some metro areas, the company will provide free same-day delivery for prescription drugs and some front-store products.

When asked about the possibility of CVS Health's pharmacy benefit management (PBM) business working with Amazon, Merlo replied that the company "would never close the door on any type of partnership." However, he framed his response in purely hypothetical language and seemed, in my view, somewhat skeptical that Amazon would be able to do something that doesn't already exist in the marketplace now.

3. Thoughts on tax reform

CVS Health's effective tax rate tends to be very high, so what does the company think about GOP efforts to reform the U.S. corporate tax structure? Merlo said that "any type of meaningful comprehensive reform should be beneficial to our business."

Tax reform sign against blue, partly cloudy sky

Image source: Getty Images.

David Denton added that "most scenarios" being put forward about tax reform would work to CVS Health's benefit. He said that it's still too early to know what changes the company might make in response to tax reform. However, Denton also stated that, if tax relief was meaningful enough, "there's a lot of investments that we think we can make within our business model that can more rapidly expand our business model across the country and deliver better care and higher quality and lower costs."

4. What's ahead

CVS Health's fourth-quarter results should be better on one count and worse on another. Profits should be helped in the fourth quarter, according to Denton, due to the shift of Medicare Part D risk-corridor payments to later in the year. However, the company expects negative free cash flow next quarter because of a planned settlement payable to the Centers for Medicare and Medicaid Services (CMS) associated with the 2016 plan year.

The company won't provide 2018 guidance until December. Merlo mentioned some of the headwinds and tailwinds that would impact the company next year, though. Those headwinds include continued reimbursement pressures. Tailwinds included new network arrangements and a strong PBM selling season for 2018, along with the company's streamlining initiative beginning to pay off.

5. About that big acquisition

As for the potential acquisition of Aetna (NYSE: AET) , CVS Health's executives said... nothing. Michael McGuire, vice president of investor relations, set the tone with his initial comment early in the call that, "It is our policy to not comment on rumors or speculation in the marketplace." Analysts took the hint and didn't ask any direct questions about a possible Aetna buyout.

There were a few indirect questions, however. Denton was asked if CVS Health views mergers and acquisitions (M&A) as a necessity. He responded that, "M&A has always been at the core of our business, and we will continue to do that as we think -- as we look forward."

Denton was also asked if CVS Health would ever make a deal that resulted in a downgrade of its credit rating. Denton replied: "That's a really big speculatory kind of question. We would make the right investments in our business model to do what's best for us long term, and we would evaluate it on each transaction point at a time."

Sometimes, what's left unsaid speaks as loudly as what's actually said. CVS Health didn't attempt to squelch the story about a potential acquisition of Aetna. And management left open the possibility of taking on considerable debt to fund a deal.

Later in the day, McKesson announced that it was buying CVS Health's specialty distribution unit for $735 million in cash. This sale could be one of the dominoes falling to set up a purchase of Aetna. CVS Health isn't talking now, but expect plenty of discussion in the near future.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Keith Speights has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends CVS Health and McKesson. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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