CVS Health Corporation CVS reported second-quarter 2015 adjusted earnings per share (EPS) of $1.22, up a solid 7.9% year over year. The bottom line also outshone the Zacks Consensus Estimate by 1.6% and exceeded the company-provided guidance range of $1.17−$1.20 per share.
The adjustments include acquisition-related financing costs related to the proposed Omnicare and Target acquisitions. Without the one-time adjustments, reported EPS in the second quarter increased 5.3% to $1.12.
The Quarter Under Review
Net revenue in the second quarter improved 7.4% year over year to $37.17 billion, closely beating the Zacks Consensus Estimate of $37.15 billion. This year-over-year improvement came primarily on the back of balanced growth in both Pharmacy Services and Retail Pharmacy segments.
The Pharmacy Services segment’s revenues increased 11.9% to $24.4 billion in the quarter. The segment gained from growth in specialty pharmacy business and increased volume in pharmacy network claims.
Pharmacy network claims processed during the quarter increased 8.7% to 229 million, backed by net new business and growth in Managed Medicaid. Moreover, growth in specialty claim volume and increased claims associated with the continued adoption of Maintenance Choice offerings, brought the Mail Choice claims processed to 21.3 million, up 3.9%.
Revenues from CVS’ Retail Pharmacy improved 2.2% year over year to $17.2 billion. Same-store sales increased 0.5%, while front-end same-store sales declined 7.8% year over year. The front-end same-store sales decline was attributed to softer customer traffic, partially offset by an increase in basket size. According to the company, excluding tobacco and the estimated associated basket sales from the year-ago period, front-store same-store sales would have been approximately 780 basis points (bps) higher.
Pharmacy same-store sales increased 4.1% in the reported quarter. Despite generic introductions and implementation of Specialty Connect affecting sales by 370 bps and 80 bps respectively, CVS posted pharmacy same-store sales growth. Moreover, Pharmacy same-store prescription volumes rose 4.8% on a 30-day equivalent basis.
The generic dispensing rate (the proportion of all generic prescriptions to total number of prescriptions dispensed) soared 150 bps to reach 83.9% in the Pharmacy Services segment and 85% in the Retail Pharmacy segment.
Although gross profit increased 1.2% to $6.4 billion, gross margin contracted 105 bps to 17.2%. Operating profit for the Pharmacy Services increased 7.1% while the same for the Retail Pharmacy segment declined 1.4%. Total operating margin during the quarter contracted 30 bps to reach 6.1% due to a 0.6% increase in operating cost.
CVS exited the second quarter with cash and cash equivalents and short-term investments of $1.40 billion, down from $1.63 billion at the end of Mar 2015. Net cash provided by operating activities for the quarter was up 52.5% from the first quarter of 2015 at $3.02 billion.
During the second quarter, CVS opened 25 retail drugstores and closed 5 existing stores plus one branch for infusion and enteral services. Further, the company relocated 16 retail drugstores.
As of Jun 30, 2015, CVS operated 8,028 locations, which include 7,870 retail drugstores, 18 onsite pharmacies, 24 retail specialty pharmacy stores, 11 specialty mail order pharmacies, 4 mail service dispensing pharmacies, 85 branches for infusion and enteral services including approximately 72 ambulatory infusion suites and six centers of excellence in 47 states, as well as the District of Columbia, Puerto Rico and Brazil.
Guidance
CVS Health exited the second quarter on a better-than-expected note. This, along with the company’s decision to reduce the current year's share repurchases by $1 billion due to acquisitions, led CVS Health to narrow its earlier-provided guidance for full-year 2015. The company currently expects 2015 adjusted EPS in the range of $5.11−$5.18 compared to the earlier band of $5.08−$5.19.
The current Zacks Consensus Estimate of $5.16 remains above the midpoint of the guidance range. Meanwhile, free cash flow guidance is still expected in the range of $5.9−$6.2 billion while cash flow from operations is projected within $7.6−$7.9 billion.
For the third quarter of 2015, the company expects to report adjusted EPS in the range of $1.27−$1.30. The current Zacks Consensus Estimate of $1.37 exceeds the range.
Our Take
CVS Health posted yet another solid quarter with earnings and revenues exceeding the respective Zacks Consensus Estimate by decent margins. The Pharmacy Services segment benefited from growth in the Specialty Pharmacy business while the Retail Pharmacy segment gained from increased same-store sales.
The company’s exit from the tobacco business positively impacted Retail Pharmacy business sales during the quarter. Moreover, the company is having a highly successful 2016 PBM selling season having won significant net new business.
Currently, the stock carries a Zacks Rank #3 (Hold). Some of the top-ranked stocks in the broader Medical sector are Hospira Inc. HSP, LeMaitre Vascular, Inc. LMAT and Abaxis, Inc. ABAX, all carrying a Zacks Rank #1 (Strong Buy).
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