Conservative · Portfolio Changes

CVS Posts Strong Earnings; Cuts Outlook

CVS  Shares of CVS Health (NYSE: CVS -$83.39) are trading sharply lower in pre-market trading as the company slashed its guidance for the remainder of the year and lowered its outlook for 2017 amid growing competition and lower drug prices. The company warned that it stands to lose 40 million prescriptions next year as deals signed by rival Walgreens Boots Alliance with other participants in the drug supply chain shut out CVS stores.  In the latest quarter, CVS reported a profit of $1.54 billion and excluding certain items, per-share profit rose to $1.64 from $1.28. Revenue increased 15.5% to $44.62 billion. Analysts predicted $1.57 in earnings on $45.29 billion in revenue. Revenues in the Retail/Long-Term-Care Segment increased 12.5% from a year ago and pharmacy network claims processed during the quarter increased 23.3%. Pharmacy same store sales rose 3.4% and pharmacy same store prescription volumes rose 3.0%, while front of store sales declined 1%. However, CVS cut its 2016 adjusted earnings forecast to $5.77-$5.83 per share from its prior forecast of $5.81-$5.89 per share. The company said it now expects 2017 adjusted profit to be in the range of $5.77-$5.93 per share, well below average analysts’ estimates of $6.52 per share.

       CVS also approved a new share repurchase program to buy back up to $15 billion of its outstanding shares. This is in addition to the $3.7 billion that remains from a previous repurchase program. While the outlook in the short run has deteriorated, the well-covered dividend adds appeal as does the company’s strong cash flow generation. CVS generated $6.6 billion in free cash flow during the quarter, which will be used to reduce debt, increase the dividend and repurchase shares.  I would not be surprised to see management look to the acquisition market to further broaden its customer base. I will continue to monitor the long-term implications of the recent events, but I am holding the shares in the conservative portfolio for now.


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