Will CVS Health's (CVS) PBM Strength Boost Q3 Earnings?

CVS HealthCVS is scheduled to report third-quarter 2018 results on Nov 6, before the opening bell. Last reported quarter, the company delivered a positive earnings surprise of 4.97%. Its average trailing four-quarter beat is 3.43%.

Let's take a look at how things are shaping up prior to this announcement.

Factors at Play

CVS Health has so far progressed well with its 2019 PBM selling season. Per the last-reported numbers, client retention rate was higher than the year-ago quarter rates and the company had completed 70% of the 2019 renewals. This momentum is expected to be seen in the to-be-reported quarter as well.

Despite a tough pricing competition, CVS Health is currently gaining on high level of service and execution, a competitive pricing along with unique integrated model.

The company is also upbeat about sustaining a solid year-over-year revenue trend during the third quarter of 2018, thereby realizing gains from the Pharmacy Services segment. Such a performance can be attributable to higher specialty pharmacy and pharmacy network claim volumes as well as brand inflation.

CVS Health Corporation Price and EPS Surprise

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

Management stated that CVS Health's specialty business is its top priority to help it expand its customer base. The company is poised to capitalize on this opportunity on the back of wide and differentiated offerings including Specialty Connect.

Further, the company expects drug price inflation, product launches and higher utilization to fuel growth. We expect the Pharmacy Services segment to be a stable growth platform.

Within the PBM Segment, the company projects revenues to grow 1.25-3.25% in the third quarter. Operating profits are expected to be flat to up low-single digits. Per CVS Health, the timing shift of certain client contractual commitment in the quarter to be reported is going to contribute to the top line.

The Zacks Consensus estimate for the Pharmacy Services segment revenues is pegged at $33.77 billion, reflecting a 2.7% increase on a year-over-year basis.

Within the Retail/Long-Term Care Segment, CVS Health is likely to progress on its pharmacy initiatives. However, the company is worried about the challenges in the Long-Term Care business, which are anticipated to weigh more heavily on its second-half Retail/Long-Term Care growth expectations.

For the third quarter, CVS Health estimates the company's Retail/Long-Term Care revenue growth in the range of 4.5-6% and operating profit to be down by mid-single digits. Retail same store sales growth is forecast in the band of 4.75-6.25% and adjusted script comps might rise 8.75-9.25%.

The Zacks Consensus Estimate for the Retail/Long-Term Care segment revenues is pegged at $20.7 billion, representing a 5.5% improvement on a year-over-year basis.

Overall, downsides such as persistent reimbursement pressure, rising generic dispensing rate and recent generic drug introductions have been affecting the business.

Here is What Our Quantitative Model Predicts:

Our proven Zacks model shows that a company with a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has maximum chances of beating estimates if it also has a positive Earnings ESP .

CVS Health has a Zacks Rank #3, which increases the predictive power of ESP. However, its Earnings ESP of 0.00% makes surprise prediction difficult.

You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Meanwhile, the Zacks Consensus Estimate for third-quarter adjusted EPS of $1.71 indicates a 14% ascent year over year.

Stocks to Consider

Following are a few medical stocks worth considering with the right combination of elements to beat on earnings in the upcoming quarterly results:

Haemonetics Corporation HAE has an Earnings ESP of +5.56% and a Zacks Rank of 1. You can see the complete list of today's Zacks #1 Rank stocks here .

Humana Inc. HUM has an Earnings ESP of +2.22% and a Zacks Rank #2.

Natera, Inc. NTRA has an Earnings ESP of +6.01% and a Zacks Rank of 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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