CVS Delivers Strong Results; Narrows Guidance

Stronger pharmacy sales boosted CVS Health Corp.’s (NYSE: CVS – $67.69) revenue in its latest quarter by 3.5% to $46.2 billion, matching what analysts expected. In its latest quarter, sales in CVS’s pharmacy benefits management segment increased 8.1% to $32.9 billion, driven by growth in pharmacy network claims and specialty pharmacy volume. Retail segment sales, meanwhile, slipped 2.7% to $19.6 billion, hurt by falling same-store sales. Pharmacy same store sales decreased 3.4% and front store same store sales declined 2.8%, which were negatively impacted by softer customer traffic and efforts to rationalize promotional strategies, partly offset by an increase in basket size.  Excluding one-time items, the Woonsocket, R.I.-based company earned $1.50 a share, compared with $1.64 a year ago, and two cents better than analysts’ expectations.  CVS generated cash flow from operations of $8.1 billion and free cash flow of $7.0 billion during the third quarter.

       The Wall Street Journal reported last month that the drugstore giant is in talks to buy Aetna for $66 billion following a six-month hunt for a deal partner, but management did not address this proposal during its earning’s conference call. Looking ahead, the company narrowed and raised the mid-point of the range for full year adjusted earnings to $5.87 to $5.91 per share from $5.83 to $5.93, with a fourth quarter range of $1.88 – $1.92. CVS also announced plans to bring prescriptions directly to patients’ doors with free nationwide next-day delivery from CVS Pharmacy locations beginning in early 2018. Select cities will also offer same-day delivery within hours.

       These shares have remained relatively range-bound for most of this year, and are trading at roughly 15% below where it was a year ago, with rumors of Amazon.com’s interest in the space partly responsible. Still, this equity holds wide, risk-adjusted 3 to 5-year total return potential as the company’s size and healthy cash flow should help it maintain market share regardless of the competition.

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