CVS Caremark Corporation (CVS) is scheduled to report its second-quarter 2014 results before the opening bell on Aug 5. Last quarter, the company had posted a negative earnings surprise of 2.86% while the four-quarter trailing average beat is pegged at 1.49%. Let’s see how things are shaping up prior to this announcement.
Factors at Play
After several quarters of strong performance, last quarter, CVS Caremark delivered an unimpressive performance with an earnings miss and a marginal beat over the top line.The bottom-line results also missed the company-provided guidance. Per management, earnings failed to meet the guidance on grounds of severe unforeseen weather-related issues that the company experienced throughout the first quarter.
We are also concerned about the company constantly facing higher costs associated with its Medicare Part D business. This might hamper operating profit in the pharmacy benefit management (PBM) franchise in the near term.
Nonetheless, CVS Caremark is poised to benefit from a strong selling season, favorable industry dynamics and increasing shareholder value. The company also witnessed robust double-digit growth in Pharmacy Benefit Manager (PBM) on the back of a strong selling season.
For the second quarter, the company expects adjusted earnings per share (EPS) in the range of $1.08 to $1.11, reflecting an annualized growth of 11% to 14.75%. Within the retail segment, the company expects revenues to increase in the range of 2.5% to 4% year over year driven by strong prescription growth as well as the positive impact of Easter shift on front store sales in the second quarter. Adjusted script comps are expected to increase in the range of 2.75% to 3.75%, while total same store sales should remain in the range of 1.25% to 2.75%.
In the PBM, the company expects revenues to grow in the band of 10.75% and 12%, driven by strong growth in specialty and inflation. In addition, while the second-quarter retail operating profit is projected to grow between 4.5% and 6.5%, PBM operating profit will likely grow in the range of 18.25% to 23.25%.
However, the company expects finalization of Medicaid reimbursement ratereduction. According to CVS Caremark, considering its historical rate estimate, this finalization is expected to have a positive impact on its pharmacy margins in the second quarter. Nevertheless, the front stores margins are expected to decline in the second quarter due to the anticipated discounting of some inventory related to the company’s exit from the tobacco category as well as tough comparisons with the year-ago quarter. Overall, the company expects a strong second quarter 2014.
Earnings Whispers?
Our proven model does not conclusively show that CVS Caremark is likely to beat earnings this quarter. It is because a stock needs to have both a positive Earnings ESP (Expected Surprise Prediction) and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is, however, not the case here as you will see below.
Zacks ESP: CVS Caremark’s earnings ESP is pegged at 0.00%, as both the Most Accurate estimate and the Zacks Consensus Estimate both stand at $1.10.
Zacks Rank: Although CVS Caremark’s Zacks Rank #3 (Hold) increases the predictive power of ESP, when combined with a 0.00% ESP, it makes surprise prediction difficult.
In addition, we caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing a negative estimate revision momentum.
Other Stocks to Consider
Here are three companies you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:
Medtronic, Inc. (MDT) has an earnings ESP of +1.09% and sports a Zacks Rank #2 (Buy). Medtronic will be reporting first-quarter earnings on Aug 19.
Wright Medical Group Inc. (WMGI) has an earnings ESP of +2.22% and holds a Zacks Rank #2. Wright Medical Holding will announce its second-quarter 2014 earnings on Aug 5.
Health Net, Inc. (HNT) has an earnings ESP of +1.79% and sports a Zacks Rank #2. Health Net will be reporting second-quarter earnings on Aug 6.
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