What's Behind CVS Health Corp's Fabulous Performance?

Company raises full-year 2020 guidance

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Nov 06, 2020
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Before the opening bell on Nov. 6, CVS Health Corp. (CVS, Financial) released third-quarter results that topped Wall Street's expectations.

Brief summary of the quarter

The Woonsocket, Rhode Island-based company posted net income of $1.22 billion, translating to earnings of 93 cents per share. Adjusted earnings came in at $1.66 per share, which exceeded analysts' estimates of $1.33. Revenue of $67.06 billion climbed 3.5% year over year and surpassed expectations of $66.66 billion.

President and CEO Larry J. Merlo commented on the company's performance:

"Our strong third quarter results demonstrate continued execution of our long-term strategic plan that is transforming the way health care is delivered. As an integrated health services provider, we're developing holistic and innovative solutions that meet the needs of our customers in the community, in the home or in the palm of their hand."

Operating income grew 11% from the prior-year quarter as the company sold its Coventry Health Care Workers' Compensation business, which resulted in a $271 million pre-tax gain. Additionally, people postponed elective procedures and voluntary use of their health care benefits due to Covid-19.

Segment performance

Revenue attributable to the Pharmacy Services segment amounted to $35.7 billion, down $307 million from last year as disclosed client losses coupled with persistent price compression negated the growth in specialty pharmacy and brand inflation. Operating income surged 16.7% in the reported quarter thanks to lower amortization expense.

Revenue in the Retail/LTC segment rose approximately 6% in the three months ended Sept. 30. The company did witness growth in the retail pharmacy prescription volume as well as brand inflation. Front of the store revenue inched up 2.7% thanks to strong customer health sales as well as a rise in basket size. Prescriptions filled grew 4.6% on a 30-day equivalent basis. Operating income rose 17.2% due to the absence of store rationalization expense to the extent of $96 million associated with strategic closures of underperforming retail pharmacy stores.

In the Health Care Benefits division, revenue surged 8.8% year over year to $18.7 billion, which was highly driven by growth in the segment's government products as well as positive impacts from cost savings measures. By contrast, operating income dropped 8.4% due to coronavirus-related expenses.

Response to Covid-19

The drugstore chain announced in late March that it would employ as many as 50,000 additional part-time, full-time and short-term workers to help keep pace with the increased demand in addition to helping with services like home prescription delivery. So far, the company has engaged more than 76,000 workers. In a statement, Merlo provided a detailed update on the company's response to Covid-19:

"Our comprehensive pandemic response shows the power of a diverse and agile enterprise. We've opened more than 4,000 COVID-19 test sites across the country since March, and have administered over six million tests. We're helping businesses and universities safely reopen and we were recently selected to administer COVID-19 vaccinations in long-term care facilities."

2020 outlook

For 2020, CVS Health predicts earnings to fall within the range of $7.35 to $7.45 per share. That compares favorably with its previously forecasted range of $7.14 to $7.27 per share. Operational cash flow is anticipated to between $12.75 billion and $13.25 billion, up from the $11 billion to $11.5 billion range predicted earlier.

Disclosure: I do not hold any positions in the stocks mentioned.

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