CVS Health (CVS) Q4 Earnings: A Beat in Store for the Stock?

We expect pharmacy innovation company CVS Health CorporationCVS to beat expectations when it reports fourth-quarter 2016 results on Feb 9.

Last quarter, CVS Health's earnings outpaced the Zacks Consensus Estimate by 4.46%. The company beat earnings in three of the prior four quarters, with a positive average surprise of 1.93%.

Why a Likely Positive Surprise?

Our proven model shows that CVS Health is likely to beat earnings because it has the right combination of two key ingredients.

Zacks ESP : CVS Health has an Earnings ESP of +0.64%. That is because the Most Accurate estimate is $1.68 while the Zacks Consensus Estimate is pegged lower at $1.67. A favorable Zacks ESP serves as a meaningful and leading indicator of a likely positive earnings surprise. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks Rank : CVS Health currently carries a Zacks Rank #3 (Hold). Note that stocks with Zacks Ranks #1 (Strong Buy), #2 (Buy) or #3 have a significantly higher chance of beating earnings. Conversely, the Sell-rated stocks (#4 and #5) should never be considered going into an earnings announcement.

The combination of CVS Health's Zacks Rank #3 and a positive ESP makes us reasonably confident of an earnings beat this quarter.

What's Driving the Better-than-Expected Earnings?

CVS Health Corporation Price and EPS Surprise

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

CVS Health is optimistic about sustaining its solid year-over-year earnings trend in 2016 driven by the gains to be realized from the Pharmacy Services segment. However, according to the company, there are several timing factors that have already started to affect the cadence of profit delivery.

These factors include the introduction and timing of break-open in generics, the timing of profitability in Medicare Part D business, the timing of the benefits from the company's strategies to drive growth in the front end, and the timing of share repurchases along with certain tax benefits among others.

During the third quarter earnings release, the company already noted that, the timing shift related to a lower tax rate benefited the quarter's earnings by approximately 5 cents a share on resolution of certain tax matters.

However, earlier, management noted that these timing factors will lead to a back-half weighted profit growth in 2016. The fourth quarter accordingly, may get to see a ramp up in growth in comparison to the previous quarters.

Overall, the company projects to deliver healthy PBM growth on a successful PBM selling season. Specialty business is expected to record strong growth and SilverScript's business is also expected to continue performing very well.

The Retail business on the other hand, is expected to be challenged on the impact of the network changes and retail trends. However, we are looking forward for the company to benefit from the acquisition of Target Pharmacy, whose integration has been completed lately.

Earlier, CVS Health issued its fourth-quarter adjusted EPS (earnings per share) guidance in the range of $1.64−$1.70.The current Zacks Consensus Estimate of $1.67 falls near the upper end of the guided range.

We take a note that CVS Health's estimate revision trend fails to depict any conclusive picture. For the current year, the company saw three upward movements with one movement in the opposite direction, over last 60 days. The magnitude of the trend on the other hand was unfavorable with earnings estimates slipping 0.17%, over the same time frame.

Stocks to Consider

Here are some companies you may want to consider as our model shows these have the right combination of elements to post an earnings beat this quarter:

Applied Optoelectronics, Inc. AAOI , with an Earnings ESP of +15.87% and a Zacks Rank #1.

Booz Allen Hamilton Holding Corporation BAH , with an Earnings ESP of +10.77% and a Zacks Rank #1.You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Copa Holdings, S.A. CPA , with an Earnings ESP of +0.93% and a Zacks Rank #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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