CVS Health Beats Estimates; Lowers Short-Term Guidance

Retail drugstore chain and pharmacy benefits manager CVS Health (NYSE: CVS – $78.02) reported adjusted earnings per share of $1.33, beating the $1.31 consensus. Revenue for the quarter rose 4.5% to $45.7 billion, also ahead of the $45.4 billion modeled by analysts. Operating profit in the Retail/Long-Term-Care Segment was in line with expectations on a 2.2% sales decrease, while operating profit in the Pharmacy Services Segment exceeded expectations with an increase of 9.5% to $32.3 billion. Pharmacy same-store sales fell 2.8%, affected by about 410 basis points by recent generic introductions. Front-of-store same-store sales fell 2.1%, caused by softer traffic and store promotions, despite the shift of the Easter holiday to the second quarter vs. in last year’s first period. During the quarter, the company opened 27 new retail locations and closed three stores and relocated 10. As of June 30, the company operated 9,700 locations, including pharmacies in Target stores, in 49 states, the District of Columbia, Puerto Rico and Brazil. As previously disclosed, the company intends to close about 70 retail stores during 2017. 

       CVS upped its full-year guidance, expecting adjusted earnings per share to be $5.83 to $5.93 versus a previous $5.77 to $5.93, and compared to Street views of $5.87. For the upcoming third quarter, however, the company is projecting adjusted earnings of $1.47 to $1.50 per share, well below consensus estimates of $1.63. Management confirmed its 2017 cash flow from operations guidance of $7.7 to $8.6 billion and free cash flow guidance of $6.0 to $6.4 billion, assuming the completion of $5.0 billion in share repurchases. 

       This equity has pulled back a bit in recent months and is negative over the past year by about 18.5%. However, appreciation potential out to 2020-2022 appears healthy, especially when viewed on a risk-adjusted basis. Strong cash flow generation should allow CVS to continue rewarding shareholders via dividends and share buybacks, too. That said, Amazon’s potential move into the pharmacy space is a concern and the company has been the subject of recent legal issues with the State of Minnesota and the Medicare program regarding pricing and billing practices, adding another degree of uncertainty for the shares. However, I am going to continue to hold on for now.

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