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CVS Health (CVS) Q4 Earnings Beat Estimates, ’18 View Upbeat

Zacks

CVS Health Corporation’s CVS fourth-quarter 2017 adjusted earnings per share (EPS) of $1.92 were up 12.3% year over year. The adjusted EPS also beat the Zacks Consensus Estimate by 3 cents. This one-time adjustment excludes the impact of a $1.5 billion income tax benefit resulting from the latest tax reform.

Reported EPS from continuing operations came in at $3.22 per share, a 102.5% surge from the year-ago period.

Full-year 2017 adjusted EPS came in at $5.90, a 1% improvement from the year-ago adjusted number.

Net revenues in the fourth quarter increased 5.3% year over year to $48.39 billion, exceeding the Zacks Consensus Estimate by 1.8%.


CVS Health Corporation Price, Consensus and EPS Surprise

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

Revenues for the year 2017 were $184.77 billion, a 4.1% improvement from 2016. Revenues also beat the Zacks Consensus Estimate of $183.88 billion.

Quarter in Details

Pharmacy Services revenues increased 9.3% to $34.2 billion in the reported quarter, driven by growth in specialty pharmacy volumes, higher pharmacy network volumes as well as brand inflation. This was, however, partially offset by increased generic dispensing and continued price compression.

Pharmacy network claims processed during the quarter climbed 8.2% to 389.7 million on a 30-day equivalent basis, backed by net new business growth. Also, the Mail Choice processed claim count was 69 million, up 5.9% on a 30-day equivalent basis on continued adoption of Maintenance Choice offerings and a rise in specialty pharmacy claims.

Revenues from CVS Health’s Retail/LTC were up by a marginal 0.3% year over year to $20.9 billion. According to the company, a 2.5% increase in same store prescriptions on a 30-day equivalent basis and brand inflation were partially offset by continued reimbursement pressure and an increase in the generic dispensing rate.

Front-end same-store sales were down 0.7% year over year but were positively impacted 80 basis points by seasonal cough and cold. Front-store sales were adversely affected by soft customer traffic and efforts to rationalize promotional strategies, which were partially offset by an increase in basket size.

Pharmacy same-store sales increased 0.4% in the reported quarter. Sales were adversely affected by approximately 340 basis points (bps) due to recent generic drug introductions. This apart, marketplace changes that restricted CVS Pharmacy from participating in certain networks had a 320-bps negative impact on same-store prescription volumes in the reported quarter.

The generic dispensing rate (the proportion of all generic prescriptions to total number of prescriptions dispensed) increased approximately 80 bps to 86.9% at the Pharmacy Services segment and around 160 bps to 86.8% at the Retail/LTC segment.

Gross profit improved 3.9% to $7.9 billion. However, gross margin contracted 21 bps to 16.3%. Total operating margin in the quarter declined 10 bps to 6.4%.

CVS Health exited the year 2017 with cash and cash equivalents and short-term investments of $1.81 billion compared with $3.45 billion at the end of 2016. Full-year, net cash provided by operating activities was $8 billion, down 21% from the year-ago period.

During the fourth quarter, CVS Health opened 65 new retail stores and closed 13 and relocated five retail locations. As of Dec 31, 2017, CVS Health operated 9,803 retail stores, including pharmacies in Target stores across 49 states as well as the District of Columbia, Puerto Rico and Brazil.

Outlook

The company has revised its outlook for 2018. The revision reflects the effects of the tax reform achieved through the Tax Cuts and Jobs Act (TCJA).

Management noted that, with $1.2 billion in cash benefits from the TCJA, the company will be able to make strategic investments in 2018 to stimulate greater growth over the longer term.

Accordingly, the company has increased its 2018 adjusted operating profit growth guidance to a range of 1% to 4% from the earlier-stated range of (1.5%) to 1.5%.

Earlier, while providing its 2018 initial outlook, CVS Health noted that, it expects to deliver net revenue growth of 0.75% to 2.5% in the year. The current Zacks Consensus Estimate for the full-year revenues is pegged at $188.04 billion.

For the first quarter of 2018, the company expects to register adjusted operating profit growth in the range of 0.5% to 4.5%.

Our Take

CVS Health ended the year 2017 on a solid note with a better-than-expected fourth-quarter performance. The year-over-year growth in the top line was driven by a strong Pharmacy Services segment, benefiting from the upside in the specialty services. However, year-over-year Retail/LTC comparisons were dull.

Zacks Rank & Key Picks

CVS Health has a Zacks Rank #3 (Hold).

A few better-ranked stocks that reported solid results this earnings season are PetMed Express PETS, PerkinElmer PKI and Becton, Dickinson and Company BDX. While PetMed sports a Zacks Rank #1 (Strong Buy), PerkinElmer and Becton, Dickinson carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

PetMed recently reported third-quarter fiscal 2018 results. Adjusted earnings per share of 44 cents were up 88.3% from the prior-year quarter. Revenues rose 13.7% on a year-over-year basis to $60.1 million.

PerkinElmer reported fourth-quarter 2017 adjusted earnings per share of 97 cents. Adjusted revenues were approximately $641.6 million, up from $567 million in the year-ago quarter.

Becton, Dickinson reported first-quarter 2018 adjusted earnings per share of $2.48, up 3.9% at constant currency. Revenues are $3.08 billion, up 3.7% at constant currency.

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