CVS Reports Lower Profits; Confirms Guidance

  Drug store chain and pharmacy benefits manager CVS Health (NYSE: CVS – $78.97)10 reported sales in the pharmacy services segment strengthened, increasing 8.5% to $31.2 billion, in part driven by an 11% jump in network claims. CVS said it had won net new pharmacy benefits business of about $5.4 billion in the quarter. Brand inflation and growth in specialty pharmacy also helped, partly offset by more generics, leading to lower prices. Sales in CVS’s retail segment, meanwhile, slipped 3.8% to $19.3 billion, dragged by a decline in same-store sales, as well as pressure from reimbursements and generics. Softer traffic and changes to promotions contributed to a 4.9% decline in same-store sales at the front of the store, where CVS sells everyday non-pharmacy items. Prescription same-store sales fell 4.7%, hurt by recent generic drug introductions. The company said it closed 60 retail stores in the period and expects to close about 10 additional stores during the rest of 2017.

       Over all, CVS reported a profit of $952 million, and adjusted earnings per share of $1.17, a penny below last year’s results. The company had forecast $1.07 to $1.13 and the consensus estimate was $1.16 per share. Revenue rose 3% to $44.5 billion, above expectations of $44.2 billion, according to analysts. Looking ahead, management said profit for its current quarter could land on the low-end of Wall Street’s estimates, coming in at $1.29 to $1.33 a share. For the full year, management is guiding adjusted earnings per share of $5.77 to $5.93. Current valuations are pegged on CVS earning $5.86 per share.

       Traders were looking for more positive results, sending the shares down 2.5% in early trading. I still think that the stock holds considerable investment merit for those looking further out, especially after the price weakness this past year. Along with completion of its $5 billion share buyback plan, strong balance sheet and a growing dividend yielding 2.4%, the shares can be held in a well-diversified conservative account for above-average total returns.

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