It has been about a month since the last earnings report for CVS Health (CVS). Shares have added about 0.2% 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 the 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 third-quarter 2018 adjusted earnings per share (EPS) of $1.73 surged 15.3% year over year and exceeded the Zacks Consensus Estimate of $1.71. The quarter's adjusted EPS considered certain transaction and integration costs related to the proposed acquisition of Aetna and the purchase of Omnicare.
On a reported basis, earnings came in at $1.36 per share in the quarter, a 7.9% improvement year over year.
Net revenues in the third quarter increased 2.4% year over year to $47.27 billion. This surpassed the Zacks Consensus Estimate by 0.2%.
Quarter in Details
Pharmacy Services revenues increased 2.6% to $33.8 billion in the reported quarter, driven by growth in pharmacy network and mail choice claim volume as well as brand inflation. This was, however, partially offset by continued price compression.
Pharmacy network claims processed during the quarter climbed 5.4% to 394.5 million on a 30-day equivalent basis, backed by net new business growth. Also, the Mail Choice claim processed count was 71.8 million, up 7.4% on a 30-day equivalent basis on continued adoption of Maintenance Choice offeringsand an increase in specialty pharmacy claims.
Revenues from CVS Health's Retail/LTC were up by 6.4% year over year to $20.9 billion. According to the company, a 9.2% increase in same store prescriptions on a 30-day equivalent basis, continued adoption of Patient Care Programs, alliances with PBMs and health plans, inclusion in a number of additional Medicare Part D networks and brand inflation were partially offset by continued reimbursement pressure.
Front store same-store sales were up 0.8% year over year on continued to benefit from strength in the company's consumer health care and beauty care categories.
Pharmacy same-store sales increased 8.7% in the reported quarter driven by the increase in pharmacy same store prescription volumes, partially offset by continued reimbursement pressure and a negative impact of approximately 190 basis points due to recent generic introductions.
The generic dispensing rate (the proportion of all generic prescriptions to total number of prescriptions dispensed) increased approximately 20 bps to 87.2% at the Pharmacy Services segment and improved around 10 bps to 87.3% at the Retail/LTC segment.
Gross profit improved 2.9% to $7.3 billion. Accordingly, gross margin expanded 9 bps to 15.5%. Adjusted operating margin in the quarter however, contracted 43 bps to 4.9%.
CVS Health exited the third-quarter 2018 with cash and cash equivalents and short-term investments of $41.7 billion compared with $43.9 billion at the end of the second quarter. Year-to-date, net cash provided by operating activities was $6.4 billion, as compared to $8.1 billion a year ago.
CVS Health reaffirmed its earlier projection to deliver full-year 2018 adjusted EPS in the band of $6.98 to $7.08. The Zacks Consensus Estimate for earnings is pegged at $7.05 per share, within but near to the upper end of the company's guided range. This apart, its 2018 adjusted operating profit growth guidance still remains in the range of (0.75%) to up 0.75%.
Further, the company expects cash flow from operations of $9 billion and free cash flow of $7 billion in 2018.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
At this time, CVS Health has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, CVS Health has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.