Can Pharmacy Services Drive CVS Health's (CVS) Q3 Earnings?

CVS Health Corporation (NYSE:CVS) is scheduled to report third-quarter 2017 results on Nov 8, before the opening bell. Last quarter, the company delivered a positive earnings surprise of 1.5%. Its trailing four-quarter average positive earnings surprise is 3.7%.

Let’s take a look at how things are shaping up prior to this announcement.

Key Catalysts

CVS Health is optimistic about sustaining a solid year-over-year earnings trend in 2017 on the back of gains to be realized from the Pharmacy Services segment. The Zacks Consensus Estimate for third-quarter Pharmacy Services segment revenues of $33.1 billion reflects an increase of 8.9% from the year-ago quarter’s reported number.

However, there are several timing factors that have already affected the cadence of profit delivery last quarter. One such aspect was the timing of profitability in Medicare Part D business. Per the company, the same is expected to continue through the rest of 2017.

Per CVS Health, the timing of Medicare Part D profits in the third quarter remains difficult to forecast, since this is the period when the risk-sharing corridor is usually least effective at providing risk-sharing protection. Hence, any change in any current estimates like utilization, significantly impacts the timing of profits between the third and fourth quarters.

The timing of Medicare Part D profitability factor apart, the company expects benefits from enterprise streamlining initiatives to be much more in the back half of the year than the year to date figure. Keeping that in mind, at the last earnings call, the company had projected third-quarter adjusted earnings per share of $1.47-$1.50, reflecting a decline of 2.5% to an increase of 1% year over year.

Here are some other factors that might also influence CVS Health’s third-quarter results:

The company is worried about its Retail/Long Term Care business, wherein revenues are expected to be down 3.25-5% in the third quarter from the year-ago period due to the restricted network changes. Notably, the decision to restrict CVS Health from participating in the TRICARE network and many fully insured prime networks have continued to negatively impact Pharmacy sales and script comps. Additionally, the company’s adjusted script comps are expected to be in the range of down 0.75% to up 0.25% and the total same-store sales to be down in the 4-5.75% band in the yet-to-be-reported quarter.

However, it expects PBM revenues to grow 8.5%-9.75%, driven by continued strong growth in volumes and specialty pharmacy. Overall, the Zacks Consensus Estimate for third-quarter Retail Pharmacy segment net revenues of $19.3 billion reflects a decline of 3.9% from the year-ago quarter’s reported figure.

Consolidated net revenues have projected a 2.75-4.25% rise during the third quarter. Overall, the company estimates to deliver healthy PBM growth on a successful PBM selling season. Specialty business is expected to record strong growth and SilverScript’s business also hopes to retain its good performance.

Here is what our quantitative model predicts:

Our proven model does not conclusively show that CVS Health is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a solid Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here, as you will see below.

Zacks ESP: CVS Health has an Earnings ESP of -0.28%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: CVS Health currently carries a Zacks Rank #3, which increases the predictive power of ESP.

Stocks Worth a Look

Here are a few medical stocks worth considering with the right combination of elements to come up with an earnings beat this quarter.

The Cooper Companies, Inc. (NYSE:COO) has an Earnings ESP of +0.24% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Henry Schein, Inc. (NASDAQ:HSIC) has an Earnings ESP of +1.00% and a Zacks Rank #3.

Penumbra, Inc. (NYSE:PEN) has an Earnings ESP of +31.82% and a Zacks Rank of 3.

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