CVS Health's (CVS) Q1 Earnings Beat Estimate, Margins Grow

CVS Health Corporation’s (NYSE:CVS) first-quarter 2018 adjusted earnings per share (EPS) of $1.48 surged 26.5% year over year and exceeded the Zacks Consensus Estimate by 6.5%. The quarter’s adjusted EPS considered an additional adjustment for net interest expense from the proposed Aetna (NYSE:AET) acquisition.

Reported EPS from continuing operations came in at 98 cents per share, a 6.5% surge from the year-ago period.

Net revenues in the first quarter increased 2.6% year over year to $45.69 billion. However, it lagged the Zacks Consensus Estimate of $45.81 billion.

Quarter in Details

Pharmacy Services revenues increased 3.2% to $32.2 billion in the reported quarter, driven by growth in specialty claim volumes, higher pharmacy network volumes as well as brand inflation. This was, however, partially offset by increased generic dispensing and continued price compression.

Pharmacy network claims processed during the quarter climbed 6% to 399.5 million on a 30-day equivalent basis, backed by net new business growth. Also, the Mail Choice claim processed count was 69.3 million, up 8.9% on a 30-day equivalent basis on continued adoption of Maintenance Choice offerings.

Revenues from CVS Health’s Retail/LTC were up by 5.6% year over year to $20.4 billion. According to the company, a 8.5% increase in same store prescriptions on a 30-day equivalent basis, partnerships with PBM’s and health plans, inclusion in a number of additional Medicare Part D networks this year and brand inflation were partially offset by continued reimbursement pressure and an increase in the generic dispensing rate.

Front-end same-store sales increased 1.6% year over year driven by a 90 basis pointsfavorable impactof the shift of sales associated with the Easter holiday to the first quarter of 2018 from the second quarter of 2017. This apart, seasonal cough and cold positively impacted the Front-store sales by another 70 basis points approximately. However, this was adversely affected by soft customer traffic.

Pharmacy same-store sales increased 7.3% in the reported quarter. The increase in pharmacy same store prescription volumes was driven by the increase in pharmacy same store prescription volumes, partially offset by a negative impact of approximately 280 basis points due to recent generic introductions.

The generic dispensing rate (the proportion of all generic prescriptions to total number of prescriptions dispensed) increased approximately 65 bps to 87.6% at the Pharmacy Services segment and around 60 bps to 88.1% at the Retail/LTC segment.

Gross profit improved 4.3% to $6.9 billion. Accordingly, gross margin expanded 24 bps to 15%. Total operating margin in the quarter expanded 22 bps to 4.3%.

CVS Health exited the first-quarter 2018 with cash and cash equivalents and short-term investments of $42.1 billion compared with $1.81 billion at the end of 2017. At the end of the first quarter, net cash used in operating activities was $131 million, as compared to $537 million a year ago.

Outlook

CVS Health currently expects to deliver full-year 2018 adjusted EPS in the band of $6.87 to $7.08. Also, it has reiterated its 2018 adjusted operating profit growth guidance in the range of (1.5%) to 1.5%.

The company has also provided guidance for second quarter 2018. CVS Health expects to deliver adjusted EPS in the range of of $1.59 to $1.64. This apart, adjusted operating profit growth is expected in the range of flat to up 3.25%.

Our Take

CVS Health ended the first quarter of 2018 on a mixed note. While earnings were ahead of the Zacks Consensus Estimate, revenues remained behind the consensus number. However, the year-over-year growth in the top line was driven by a strong Pharmacy Services segment, benefiting from the upside in the specialty services. Also, strong year-over-year Retail/LTC comparisons were encouraging. The company currently is moving forward towards the completion of the Aetna deal.

Zacks Rank & Key Picks

CVS Health has a Zacks Rank #3 (Hold).

A few better-ranked stocks in the broader medical sector which reported solid results this season are Intuitive Surgical (NASDAQ:ISRG) , Chemed Corp. (NYSE:CHE) and Baxter International Inc. (NYSE:BAX) . While Intuitive Surgical sports a Zacks Rank #1 (Strong Buy), Chemed and Baxter carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Intuitive Surgical reported first-quarter 2018 adjusted earnings per share (EPS) of $2.44, which beat the Zacks Consensus Estimate by 22.6%. Revenues of $848 million also surpassed the consensus estimate by 10.6%.

Chemed posted first-quarter 2018 adjusted EPS of $2.72, surpassing the Zacks Consensus Estimate of $2.37. Revenues came in at $439.2 million, beating the Zacks Consensus Estimate of $420 million.

Baxter posted first-quarter 2018 adjusted EPS of 70 cents, which beat the Zacks Consensus Estimate by 12.9%. Revenues of $2.68 billion also edged past the Zacks Consensus Estimate of $2.62 billion.

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