CVS Health (CVS) Beats on Q4 Earnings, Retains '17 View

CVS Health CorporationCVS reported fourth-quarter 2016 adjusted earnings per share (EPS) of $1.71, up 11.8% year over year. The quarter's adjusted EPS beat the Zacks Consensus Estimate of $1.67 by 2.4% and exceeded the company's guided range of $1.64−$1.70.

According to the company, the solid bottom-line performance was driven by strong Retail/LTC segment results, in line with the company's expectations and PBM performance, which exceeded expectations.

Without the one-time adjustments, reported EPS from continuing operations in the fourth quarter increased 18.6% year over year to $1.59.

Full-year adjusted EPS came in at $5.84, a 13.2% improvement from the year-ago period and ahead of the company's guidance range of $5.77-$5.83. It also exceeded the Zacks Consensus Estimate by 4 cents.

Net revenue in the fourth quarter increased 10.9% year over year to $45.9 billion but missed the Zacks Consensus Estimate of $46.5 billion. The rise was driven by balanced growth in the Pharmacy Services and Retail Pharmacy segments.

Revenues in 2016 were $177.5 billion, a 15.8% improvement from 2015. However, revenues missed the Zacks Consensus Estimate of $178 billion.

CVS Health Corporation Price, Consensus and EPS Surprise

CVS Health Corporation Price, Consensus and EPS Surprise | CVS Health Corporation Quote

Quarter in Details

Pharmacy Services revenues increased 17.9% to $31.3 billion in the reported quarter on growth in the specialty pharmacy business and higher pharmacy network claims.

Pharmacy network claims processed during the quarter went up 23.9% to 294.3 million, backed by net new business growth. Moreover, the Mail Choice processed claim count was 23.2 million, up 4.7% as the continued adoption of Maintenance Choice offerings and increase in specialty pharmacy claims were partially offset by a decline in traditional mail volume.

Revenues from CVS Health's Retail/LTC improved 4.7% year over year to $20.8 billion, primarily driven by the addition of pharmacies of Target Corporation which was taken over in Dec 2015. Same-store sales decreased 0.7%, while front-end same-store sales were down 2.9% year over year.

Front-end same-store sales were impacted by soft customer traffic, efforts to rationalize promotional strategies, which were partially offset by an increase in basket size.

Pharmacy same-store sales were marginally up 0.2% in the reported quarter. Sales were affected approximately 380 basis points (bps) due to recent generic drug introductions. Moreover, Pharmacy same-store prescription volumes rose 2% on a 30-day equivalent basis.

The generic dispensing rate (the proportion of all generic prescriptions to total number of prescriptions dispensed) soared 170 bps to 85.4% at the Pharmacy Services segment and 120 bps to 85.2% at the Retail/LTC segment.

Although gross profit rose 4.2% to $7.6 billion, gross margin contracted 120 bps to 16.5%. Total operating margin during the quarter contracted 12 bps to 6.5% on a 0.9% increase in operating costs.

CVS Health exited the year with cash and cash equivalents and short-term investments of $3.45 billion, compared with $2.55 billion at the end of 2015. Net cash provided by operating activities was $10.07 billion in 2016, up 19.7% from the year-ago period.

During the fourth quarter, CVS Health opened 40 new retail stores and closed 25. Further, the company relocated 16 retail stores. As of Dec 31, 2016, CVS Health operated 9,709 retail stores, including pharmacies in Target stores across 49 U.S. states, as well as the District of Columbia, Puerto Rico and Brazil.

2017 Outlook

The company reaffirmed its earlier declared full-year 2017 adjusted EPS and cash flow guidance. Adjusted earnings are expected in the band of $5.77-$5.93. The Zacks Consensus Estimate of $5.86 is within the guided range. Full-year operating cash flow guidance is expected in the range of $7.7 billion to $8.6 billion and free cash flow in the range of $6.0 billion to $6.4 billion.

Our Take

CVS Health posted mixed fourth-quarter results with adjusted EPS beating the Zacks Consensus Estimate and revenues missing the mark. Nonetheless, year-over-year growth remained impressive with the Pharmacy Services segment benefiting from the upside in the Specialty Pharmacy and growth in Retail Pharmacy segment on the acquisition of the pharmacies and clinics of Target Pharmacy as well as an improved front store margin rate.

We believe both the recent Omnicare and Target Pharmacy acquisitions are strategic fits for CVS Health and have already started to benefit the company on multiple prospects in driving enterprise value.

Zacks Rank & Key Picks

CVS Health currently has a Zacks Rank #3 (Hold). Better-ranked medical stocks include Glaukos Corporation GKOS , Cardiovascular Systems CSII and Neogen Corp. NEOG . Glaukos sports a Zacks Rank #1 (Strong Buy) while Cardiovascular Systems and Neogen carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Glaukos gained over 100% in the last one year in comparison with the S&P 500's gain of only 23.9%. The company has a stellar four-quarter average earnings surprise of over 100%.

Cardiovascular Systems surged over 100% in the last one year compared with the S&P 500. It has a four-quarter average earnings surprise of 67.8%.

Neogen gained 32.3% in the past one year, better than the S&P 500 mark. The stock has impressive long-term earnings growth expectations of 16.7% for the next five years compared with the industry average of 15.2%.

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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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