CVS Earnings Preview: Contract Losses Likely To Impact Results

by Trefis Team
CVS Health
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CVS Health (NYSE:CVS) is scheduled to announce its first quarter results on May 2. The company is coming off a turbulent 2016, in which it lost contracts with the Department of Defense and Prime Therapeutics to its rival Walgreens. The new deals came into effect in December 1, 2016 and January 1, 2017, respectively, and should impact the company’s performance in the current fiscal year.

In the upcoming results for the quarter ended March, the consensus expectation is for CVS to report revenues of $44.37 billion, implying growth of 3% over the same period last year. On the EPS front, the company is expected to generate EPS of $1.11, which would imply a decline of almost 6% over Q1 FY’16.

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CVS has factored in the impact of the loss of contracts in its guidance and anticipates revenue growth in the range of 1-2.75% for the quarter ending March. The growth in revenues is expected to be fueled by 6.25-8% growth in PBM revenues, the flu season and an aging population in the country, offset by revenues of the Retail/Long Term Care segment, which are expected to decline in the range of 3.25-5%.  Additionally, the company anticipates to generate adjusted EPS in the range of $1.07 to $1.13, which would represent a decline of 4.75% to 9.75% on a year over year (y-o-y) basis.

Additionally, to counter the loss of contracts to Walgreens, which is expected to significantly impact CVS’s performance in the upcoming period, the company has taken a host of measures to counter the losses. Some of the measures include expanding its ongoing partnership with Optum and offering bundled service offerings to its customers. Moreover, the company plans to improve its productivity by focusing on store rationalization and optimizing its delivery platforms, to name a few. These measures are expected to bring savings to the tune of $3 billion by the end of 2021.

The Pharmacy Benefit Management division has started strongly in 2017 and, after a successful enrollment period for its Medicare plans for the current year, it now has net new business of around 4.4 billion and a retention rate of almost 97%. This should help the company cope with the contract losses and provide a solid revenue source going forward.

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