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CVS Health Corporation: Data Overview
CVS Health Corporation: Data Overview
Value Score
P/E (F1) 13.39 Q1 (Current Qtr) Q2 (Next Qtr) F1 (Current Year) F2 (Next Year)
Revisions: 0 Revisions: 0 Revisions: 2 Revisions: 3
P/E (F1) Rel to Industry -12.16
Up: 0 Down: 0 Up: 0 Down: 0 Up: 2 Down: 0 Up: 1 Down: 2
PEG Ratio 1.30
P/CFO 6.68
Qtr CFO Growth 6.36 Upside Zacks Consensus Estimate vs. Most Accurate Estimate
2 Yr CFO Growth 248.47
Asset Turnover 1.93 Most Accurate: 1.31 Most Accurate: 1.62 Most Accurate: 5.85 Most Accurate: 6.31
Zacks Consensus: 1.31 Zacks Consensus: 1.62 Zacks Consensus: 5.87 Zacks Consensus: 6.36
Momentum Score Q1 0.00% Q2 0.00% F1 -0.34% F2 -0.79%
1 week Price Cng Rel to Industry 2.07% Surprise Reported Earnings History
(F1) EPS Est 1 week change 0.00%
© 2017 Zacks Investment Research, All Rights Reserved 10 S. Riverside Plaza Suite 1600 · Chicago, IL 60606
The data on the front page and all the charts in the report represent market data as of 08/03/17, while the report's text is as of
07/07/2017
Overview
Headquartered in Woonsocket, RI, CVS Health Corporation (formerly
known as CVS Caremark Corporation) (CVS) is a pharmacy
innovation company with integrated offerings across the entire
spectrum of pharmacy care. On Sep 3, 2014, CVS Caremark
Corporation announced a change of its corporate name to CVS
Health to reflect its broader health care commitment.
The Retail/LTC Segment sells prescription drugs and a wide assortment of general merchandise, including over-the-counter drugs,
beauty products and cosmetics. With the acquisition of Omnicare, the Retail/LTC segment now also includes the distribution of
pharmaceuticals, related pharmacy consulting and other ancillary services to chronic care facilities and other care settings, as well as
commercialization services which are provided by RxCrossroads.
In Dec 2015, CVS Health acquired Target Corporation’s pharmacy and clinic businesses. CVS Health will operate Target's 1,672
pharmacies across 47 states branded as CVS Pharmacy, and Target’s 79 clinic locations will be rebranded as Minute Clinic.
This apart, despite the loss the company may incur due to FEP contract nonrenewal issue, CVS Health is optimistic about 2018
selling season too which is already off to a strong start. The company currently has $23 billion for renewal for 2018 out of which, it
has already completed about 43% of client renewals as of now.
We note that, despite tough pricing competition, CVS health is currently gaining well reflecting high levels of service and execution,
competitive pricing along with unique integrated model that allows the company to provide differentiated products and services that
generate savings, better health outcomes and convenience.
Specialty pharmacy – a high-growth avenue: The soaring demand for specialty pharmacy, especially in the on-going decade, is
likely to accelerate growth for the company. Currently, the company is working on integration of Omnicare’s specialty operation in to
the company’s existing specialty business. Besides, CVS Health’s Specialty Connect offering continues to experience strong
increases in prescription volumes along with high satisfaction scores with patients, payers and providers. We are also positive on
the company’s newly developed comprehensive set of programs to effectively manage specialty trends, which includes formulary
exclusion strategy. In 2016, this resulted in removal of a number of additional products from the 2016 standard formulary based on
guiding principles such as maintaining clinical integrity, reducing pharmacy cost for plan sponsors and effectively transitioning
members onto the formulary. Earlier, the management noted that, clients specialty represents about 22.5% of total drug spend and
is expected to grow at a mid-teens rate and reach 50% by 2018.
According to recent data, 3 million people in the U.S. are currently in need of specialty treatment while the potential cost of treatment
tends to be very high. With management’s notification that the company’s specialty business remains a top priority for customers,
we believe CVS Health is well positioned to capitalize on that opportunity based on its broad, differentiated offering which includes
the likes of Specialty Connect. Moving forward, management expects drug price inflation, new product launch, higher utilization and
new PBM clients to fuel growth. We expect the segment to serve as a stable growth platform going forward.
Target Pharmacy synergy Continues: : In an effort to expand its foothold in both the PBM and retail pharmacy space as well as
cut competition from Walgreens, CVS Health has taken strategies like value added acquisition. Post the company’s colossal $12.7
billion acquisition of Ohio-based pharmacy services provider Omnicare, again in Dec 2015, CVS Health had acquired retail giant
Target Corporation’s pharmacy and clinic businesses for $1.9 billion. This strategic inclusion reflects a bold move on CVS Health’s
part to enhance its presence across the country by expanding into new markets such as Seattle, Denver, Portland and Salt Lake
City. The inclusion has already started to expand CVS Health's customer base, add a new retail channel for its products and
augment customer convenience.
Favorable industry dynamics: We are optimistic about domestic demographic trends, which are expected to drive utilization rates
for years to come as the population ages. Thus, retail pharmacy operators like CVS should be able to grow and capture market
share. The increasing number of lives covered following the healthcare reforms is likely to benefit CVS. In fact, we believe that
insurance coverage might be a crucial catalyst going forward. Additionally, the company’s mail order service is gaining popularity,
which will aid in providing additional top-line opportunities. In the reported quarter, CVS’ PBM generic dispensing rate (the
proportion of all generic prescriptions to total number of prescriptions dispensed) soared 140 bps to 87%. Generic substitution for
drugs is a significant factor in the reduction of prescription healthcare costs. Generic drug usage, as a percentage of total
prescriptions, is increasing.
This is likely to increase further as patents of several key branded pharmaceutical products expire over the next few years and
pressure mounts on physicians from sponsors to shift patients to less expensive generics.
Strong balance sheet: CVS exited the first quarter 2017 with cash and cash equivalents and short-term investments of $2.3 billion,
Reasons To Sell:
Disappointing Retail Sale: Within the retail Long Term Care business, revenues decreased Rising pressure to
3.8% in the first quarter on 4.7% decline in total same-store sales along with 4.7% fall in reduce
pharmacy same-store sales. Pharmacy sales comps were negatively impacted by 480 basis
points due to recent generic introductions. Same-store prescription volumes declined 1.4% on a
reimbursement rates
30-day equivalent basis. According to the company, its decision to restrict CVS from for generic drugs,
participating in the TRICARE network beginning in December and many Prime networks disappointing retail
beginning in January, negatively impacted Pharmacy sales and script comps. The network performance, highly
changes had about a 460 basis point negative impact on volumes, while tough comparison due competitive market
to the absence of leap day in 2017 had a 120 basis point negative impact on same-store
and pressure on
prescription volumes. Within the front store business, comps decreased 4.9%, reflecting softer
customer traffic. margins provide stiff
challenges to CVS
Margin pressure remains: CVS Health continues to see margin declines related to both Health.
reimbursement pressures and the mix of business. In the first quarter, while gross profit
dropped 2.4% to $6.6 billion, gross margin contracted 82 bps to 14.8%. Total operating margin
during the quarter also contracted 103 bps to 4% due to a 17.9% plunge in operating profit. According to the company, given the
recent network changes, it has become more difficult to grow share, and therefore, offset the on-going margin pressures in the near
term. So 2017 will be a challenging year from margin perspective.
Risk related to Reimbursement reduction: A significant portion of CVS Health’s net revenue is derived directly from Medicare,
Medicaid and other government-sponsored health care programs. The company is therefore subject to federal and state
reimbursement laws and regulatory requirements, anti-remuneration laws, the Stark Law and/or federal and state false claims laws.
According to the company, the continued efforts of health maintenance organizations, managed care organizations, PBM
companies, government entities, and other third party payors to reduce prescription drug costs and pharmacy reimbursement rates
may impact its profitability. In particular, increased utilization of generic pharmaceuticals has resulted in pressure to decrease
reimbursement payments to retail and mail order pharmacies for generic drugs, causing a reduction in the generic profit rate.
Competitive landscape: Despite significant new client wins in the course of a strong selling season, intense competition and tough
industry conditions act as major impediments. Major competitors such as Walgreens, Target and Wal-Mart are expanding their
pharmacy businesses. Competition is especially tough in the pharmacy segment, as other retail businesses continue to add
pharmacy departments and low-cost pharmacy options become available. Discount retailers, in particular, have made substantial
inroads in gaining market share.
Moreover, Shareholders of CVS Health anticipate severe competitive threat from the $17.2 billion mega merger between Walgreens
and Rite Aid, once the deal gets over. Numbers show that, CVS Health may have to involuntarily forego its leading position in the
drugstore space. The combined company formed on account of the Walgreens-Rite Aid merger will operate over 12,000 stores in
the U.S. and fill over 1 billion prescription drugs every day. This can spell doom for CVS Health, which currently operates about
8,300 stores in the U.S. We remain apprehensive in view of the huge and growing market leading capacity of the merged company
compared to CVS.
Poor macroeconomic condition: Although prescriptions and related health care service providers like CVS stay out of general
macro-economic turmoil, the recent debt crisis and sluggish economic conditions in U.S. could impact consumer purchasing power.
This may also influence preferences and spending patterns and result in low prescription utilization. In the reported quarter, CVS
faced pricing pressure and higher operating and remediation expenses for its Medicare Part D prescription drug business.
Quarter in Details
Pharmacy Services revenues increased 8.5% to $31.2 billion in the reported quarter on growth in the specialty pharmacy business,
higher pharmacy network claim volume as well as brand inflation, partially offset by increased generic dispensing and price
compression.
Pharmacy network claims processed during the quarter went up 10.5% to 376.8 million on a 30-day equivalent basis, backed by net
new business growth. Moreover, the Mail Choice processed claim count was 63.7 million, up 4.5% on a 30-day equivalent basis as the
continued adoption of Maintenance Choice offerings and increase in specialty pharmacy claims were partially offset by a decline in
traditional mail volume.
Revenues from CVS Health’s Retail/LTC declined 3.8% year over year to $19.3 billion, primarily due to a 4.7% decrease in same store
sales, continued reimbursement pressure and an increase in the generic dispensing rate.
Front-end same-store sales were down 4.9% year over year. Front-end same-store sales were negatively impacted by 100 basis points
(bps) due to the absence of leap day this year compared with the prior year. The shift of the Easter holiday to the second-quarter 2017
from the first-quarter 2016 had a 75 bps negative impact. Front store sales were also negatively impacted by soft customer traffic,
efforts to rationalize promotional strategies, which were partially offset by an increase in basket size.
Pharmacy same-store sales also declined 4.7% in the reported quarter. Sales were affected approximately 480 bps due to recent
generic drug introductions. Moreover, Pharmacy same-store prescription volumes dropped 1.4% on a 30-day equivalent basis. This
apart, marketplace changes that restricted CVS Pharmacy from participating in certain networks had a 460 bps negative impact on
same store prescription volumes. Also, the absence of leap day as mentioned earlier in the reported quarter had an approximately 120
bps negative impact on same store prescription volumes.
The generic dispensing rate (the proportion of all generic prescriptions to total number of prescriptions dispensed) soared 140 bps to
87% at the Pharmacy Services segment and 180 bps to 87.5% at the Retail/LTC segment.
While gross profit dropped 2.4% to $6.6 billion, gross margin contracted 82 bps to 14.8%. Total operating margin during the quarter
contracted 103 bps to 4% on a 17.9% plunge in operating profit.
CVS Health exited the quarter with cash and cash equivalents and short-term investments of $2.3 billion compared with $3.45 billion at
the end of 2016. Net cash provided by operating activities was $3.5 billion in the first quarter, up 45.8% from the year-ago period.
During the first quarter, CVS Health opened 27 new retail stores and closed 60. Further, the company relocated 10 retail stores. As of
Mar 31, 2017, CVS Health operated 9,676 retail stores, including pharmacies in Target stores across 49 U.S. states, as well as the
District of Columbia, Puerto Rico and Brazil.
2017 Outlook
Despite a dull bottom-line show, the company reaffirmed its earlier declared full-year 2017 adjusted EPS and cash flow guidance.
Adjusted earnings are expected in the band of $5.77–$5.93. The Zacks Consensus Estimate of $5.86 is within the guided range. Full-
year operating cash flow is expected in the range of $7.7–$8.6 billion and free cash flow in the range of $6.0–$6.4 billion.
Recent News
On Apr 27, 2017, CVS Health announced a new report prescription drug abuse. The report deduced the fact that Americans see
prescription drug abuse as a growing problem that is increasingly impacting their lives. The report also finds that 75% of respondents
believe the problem of prescription drug abuse is tied to people who take medication prescribed for someone else.
On Apr 6, 2017, CVS Health announced that, its current executive vice president and general counsel Thomas Moriarty has been
appointed to a newly created role of chief policy and external affairs officer for the company.
On Mar 16, 2017, CVS Health announced the launch of a prescription savings program – Reduced Rx. The main aim of this initiative is
to offer discounts on certain medications directly to patients through the company’s pharmacy benefits manager, CVS Caremark.
Industry Comparison Retail - Pharmacies And Drug Stores | Position in Industry Peers
Industry: 2 of 6
Value Score - -
Cash/Price -0.39 -2.21 9.77 -2.07 -71.00 35.96
EV/EBITDA 8.50 8.79 12.74 11.91 9.08 11.66
PEG Ratio 1.30 1.12 1.99 1.55 -4.49 NA
Price/Book (P/B) 2.44 2.44 3.22 2.75 4.51 30.42
Price/Cash Flow (P/CF) 6.68 6.72 13.49 11.81 5.41 19.47
P/E (F1) 13.39 13.81 18.98 16.15 -29.88 14.23
Price/Sales (P/S) 0.43 0.35 2.50 0.74 0.08 1.37
Earnings Yield 7.36% 6.62% 5.25% 6.20% -3.33% 7.05%
Debt/Equity 0.76 0.35 0.68 0.46 12.87 10.94
Cash Flow ($/share) 8.23 2.39 5.41 6.22 0.60 5.54
Growth Score - -
Hist. EPS Growth (3-5 yrs) 1.11% -12.98% 7.16% 11.25% -260.00% -4.17%
Proj. EPS Growth (F1/F0) 0.50% -9.24% 9.44% 9.33% -233.33% -5.15%
Curr. Cash Flow Growth 10.81% 4.54% 5.40% 15.45% -15.35% -1.72%
Hist. Cash Flow Growth (3-5 yrs) 10.47% 12.13% 6.71% 13.78% 47.90% 1.19%
Current Ratio 1.08 1.41 1.37 1.30 1.65 2.63
Debt/Capital 43.09% 31.34% 41.65% 31.34% 92.79% 91.63%
Net Margin 2.86% 0.91% 9.86% 3.69% -0.21% 9.28%
Return on Equity 16.91% 9.72% 15.93% 15.60% 11.28% 227.86%
Sales/Assets 1.93 1.75 0.54 1.57 2.83 1.24
Proj. Sales Growth (F1/F0) 3.75% 0.27% 5.19% 0.54% -3.27% 1.54%
Momentum Score - -
Daily Price Chg -1.44% 0.19% -0.10% 0.02% -0.42% 0.35%
1 Week Price Chg 2.07% 2.81% -0.00% 5.36% 5.49% -0.71%
4 Week Price Chg -0.14% 0.57% 2.17% 4.28% 1.27% -8.95%
12 Week Price Chg -4.47% -5.17% 3.07% -5.20% -40.40% -9.57%
52 Week Price Chg -18.94% -28.97% 11.66% 1.50% -65.46% -3.09%
20 Day Average Volume 4,635,552 2,154,597 0 5,391,333 35,911,896 1,000,696
(F1) EPS Est 1 week change 0.00% 0.00% 0.08% 0.00% 0.00% 6.60%
(F1) EPS Est 4 week change 0.01% 0.01% 0.32% 0.06% 0.00% 6.60%
(F1) EPS Est 12 week change 0.03% 0.26% 1.00% 0.26% NA 6.60%
(Q1) EPS Est Mthly Chg 0.00% -0.33% 0.00% -0.65% 0.00% -31.09%
Agreement
This is the extent which brokerage analysts are revising their earnings estimates in the same
direction. The greater the percentage of estimates being revised higher, the better the score for this
component.
For example, if there were 10 estimate revisions over the last 60 days, with 8 of those revisions up,
and the other 2 down, then the agreement factor would be 80% positive. If, however, 8 were to the
downside with only 2 of them up, then the agreement factor would be 80% negative. The higher the
percentage of agreement the better.
Magnitude
This is a measure based on the size of the recent change in the current consensus estimates. The
Zacks Rank looks at the magnitude of these changes over the last 60 days.
In the chart to the right, the display shows the consensus estimate from 60-days ago, 30-days ago,
7-days ago, and the most current estimate The difference between the current estimate and the
estimate from 60-days ago is displayed as a percentage. A larger positive percentage increase will
score better on this component.
Upside
This is the difference between the most accurate estimate, as calculated by Zacks, and the
consensus estimate. For example, a stock with a consensus estimate of $1.00, and a most
accurate estimate of $1.05 will have an upside factor of 5%.
This is not an indication of how much a stock will go up or down. Instead, it's a measure of the
difference between these two estimates. This is particularly useful near earnings season as a
positive upside percentage can be used to help predict a future surprise.
Surprise
The Zacks Rank also factors in the last few quarters of earnings surprises. Companies that have
positively surprised in the recent past have a tendency of positively surprising again in the future (or
missing if they recently missed).
A stock with a recent track record of positive surprises will score better on this factor than a stock
with a history of negative surprises. These stocks will have a greater likelihood of positively
surprising again.
Academic research has proven that stocks with the best Growth, Value, and Momentum Growth Score
characteristics outperform the market. The Zacks Style Scores rate stocks on each of these
individual styles and assigns a rating of A, B, C, D and F. An A, is better than a B; a B is better than Momentum Score
a C; and so on.
VGM Score
As an investor, you want to buy stocks with the highest probability of success. That means buying
stocks with a Zacks Rank #1 or #2, Strong Buy or Buy, which also has a Style Score of an A or a B.