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CVS Health’s (CVS) Q3 Earnings Top Estimate, Gross Margin Up


CVS Health Corporation’s CVS 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.

CVS Health Corporation Price, Consensus and EPS Surprise

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

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.

Aetna Acquisition Update

CVS Health noted that, the regulatory approval process for the company’s impending acquisition of Aetna is progressing as per expectation. On Oct 10, 2018, both the companies entered into a consent decree with the United States Department of Justice (DOJ) that allows the acquisition to proceed, provided Aetna agrees to sell its individual standalone Medicare Part D prescription drug plans.

Following this, Aetna has recently entered into an asset purchase agreement with a subsidiary of WellCare Health Plans, Inc. for the aforesaid divestiture. Closing of this divestiture is subject to the closing of the proposed acquisition.

Our Take

CVS Health ended the third quarter of 2018 on promising note with earnings and revenues both ahead of the respective Zacks Consensus Estimate. 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.

Also, strong year-over-year Retail/LTC comparisons were encouraging. The company currently is moving forward towards the completion of the Aetna deal.

Zacks Rank & Key Picks

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

A few better-ranked stocks in the broader medical space, which reported solid earnings this season, are Intuitive Surgical ISRG, Stryker Corp. SYK and Merit Medical Systems, Inc. MMSI. All the stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Intuitive Surgical reported third-quarter 2018 adjusted earnings per share of $2.83, which beat the Zacks Consensus Estimate of $2.65. Revenues totaled $920.9 million, also surpassing the consensus estimate of $918.6 million.

Stryker posted third-quarter 2018 adjusted earnings per share of $1.69, beating the Zacks Consensus Estimate of $1.68. Operating margin was 17.8%, up 30 bps.

Merit Medical reported third-quarter 2018 adjusted earnings per share of 47 cents, which trumped the Zacks Consensus Estimate of 42 cents. Revenues of $221.6 million edged past the consensus estimate of $218 million.

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