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CVS Health’s (CVS) Outlook for 2018 Cheered by Investors


Shares of CVS Health CVS rose 2.64% in the last trading session to close at $75.13, following the company’s announcement of a promising 2018 earnings outlook.

Per management, banking on solid growth in scripts and claims, increasing purchasing power due to the Red Oak venture, and rising net benefits from the company's reorganization initiative, CVS Health expects to witness net revenue growth in the range of 0.75-2.5% for full-year 2018. However, the Zacks Consensus Estimate for 2018 revenues is pegged at $192.07 billion, which signifies growth of 4.4% year over year.

Segment Wise Outlook

CVS Health has also been striving to return to growth in the Retail/LTC business. Management claims that the company is focused on working with all payers to drive volumes and capture market share in 2018 and beyond. Notably, it has been expanding partnerships with PBMs and health plans, and increasing participation as a preferred pharmacy in a larger number of Medicare Part D networks. Thus, for 2018, the company projects revenue growth in the range of 2.5-4% in this space, led by growth of 6-7% in the same store script. Moreover, CVS Health estimates same store sales to vary in the range of 2-3.5%.

CVS Health expects to witness revenue growth of 1.5-3.5% in the Pharmacy Services segment with growth of roughly 8%. However, management of rebates for Aetna’s Medicare Part D business, a projected rise in generic specialty introductions, prevalent pricing pressures and decreased levels of brand inflation are expected to adversely impact this segment in 2018.

2018 Operating Profit Forecast

This leading provider of integrated services across the entire spectrum of pharmacy care expects adjusted consolidated operating profit growth in the band of 1-4% in 2018. Notably, the company expects to record low-single digit adjusted operating profit growth in Retail/ Long Term Care (LTC) segment, along with a low- to mid-single digit growth in the Pharmacy Services business.

However, the operating profit growth in 2018 might be adversely impacted by around 125 basis points (bps) due to the costs associated with the following two deals inked by the company of late —

To begin with, the company’s divestiture of the provider of tailored services to pharmaceutical and biotechnology manufacturers — RxCrossroads — to McKesson Corporation MCK for a cash deal valued around $735 million. Secondly, the company recently inked a five-year agreement with Anthem, Inc. to provide services, including claims processing and prescription fulfillment to support IngenioRx, a new PBM. Notably, the agreement will be implemented on Jan 1, 2020, and will run through Dec 31, 2024.

However, this guidance assumes the company’s major Aetna AET acquisition deal to close at the end of 2018 instead of the second half, subject to approval by the company’s shareholders, regulatory bodies as well as fulfillment of certain other customary closing conditions. Thus, all the takeover-related expenses will not be included in the company's adjusted figures.

Notably, during the announcement of this $69-billion deal, the company projected $750 million of near-term synergies, with low- to mid-single digit accretion in the second year post closure of the transaction. Many view the merger as a vertical integration instead of a horizontal one which will lead to efficiency gains and solid cost cutting at CVS Health’s pharmacy benefit management (PBM) business.

CVS Health Corporation Price and EPS Surprise

Benefits from the Latest U.S. Tax Reform

The latest U.S. tax legislation, which slashes corporate tax rates from 35% to 21%, is anticipated to benefit the company with an effective tax rate of 27% and an increased cash flow of around $1.2 billion in 2018.
Revised Outlook for Q4

CVS Health now expects to report a mid-teens Pharmacy Services segment's adjusted operating profit growth rate in fourth-quarter 2017 and around 4% for full-year 2017, largely due to weaker margin performance in the PBM client and retail network claims administration process. However, the company still expects fourth-quarter operating loss from its Retail/LTC segment to be at the lower end of the previously-provided range of 1.0% to 3.5%. Also, the company estimates adjusted EPS and consolidated operating profit growth at the low end of the previously-provided ranges of $1.88-$1.92 and 5.75-8%, respectively.

Zacks Rank and Key Pick

CVS Health currently carries a Zacks Rank #3 (Hold).

A better-ranked stock in the broader medical sector is Bio-Rad Laboratories, Inc. BIO.

Bio-Rad Laboratories flaunts a Zacks Rank #1 (Strong Buy). The company has a long-term expected earnings growth rate of 25% and has gained 32.5% over the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.

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