Conservative · Stocks to Consider and Updates

CVS Beats Estimates; Ups 2018 Outlook

Excluding a $3.9 billion impairment charge, CVS Health (NYSE: CVS – $67.94) reported strong sales and earnings for the second quarter. Adjusted earnings per share came in at $1.69, above the consensus of $1.61 and $0.19 better than last year’s second period. Revenue grew 2.2% to $46.71 billion up from $45.7 billion last year, also beating Street views. Revenues in the Pharmacy Services Segment increased 2.8% to about $33.2 billion. Same-store sales increased 5.9%, as pharmacy sales rose 8.3% while front-store sales fell 1%. The company said pharmacy same-store sales were boosted by prescription volumes, partially offset by reimbursement pressure and generic introductions. The aforementioned non-cash impairment charge was related to a reduction in the outlook for its long-term care business when it acquired Omnicare in 2015. The decision reflected lower client retention rates, lower occupancy rates in skilled nursing facilities, the deteriorating financial health of numerous facility customers and continued reimbursement pressures.

       CVS Health also raised the lower end of its 2018 adjusted earnings per share outlook to $6.98 to $7.08 from $6.87 to $7.08. The previously announced acquisition of Aetna was approved by shareholders of both companies in March and the regulatory approval process is proceeding within a timeframe consistent with expectations. I remain cautiously optimistic on the stock and on management’s ability to find creative and profitable ways to reduce healthcare costs and deliver better care. The 3.1% dividend yield adds to the stock’s appeal and shares are trading well below its historic valuation at 9.7 times estimated earnings for the year.

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