CVS Health Corporation (CVS Quick QuoteCVS - Free Report) reported third-quarter 2016 adjusted earnings per share (EPS) of $1.64, up 28.1% year over year. The adjustment considers certain asset amortization, acquisition-related integration costs and the loss incurred on early extinguishment of debt.

The quarter‘s adjusted EPS beat the Zacks Consensus Estimate of $1.57 by 4.5% and exceeded the company’s guided range of $1.55−$1.58.

Without the one-time adjustments, reported EPS from continuing operations in the third quarter increased 30% year over year to $1.43.

Quarter in Details

Net revenue in the third quarter increased 15.5% year over year to $44.6 billion but missed the Zacks Consensus Estimate of $45.3 billion. The upside was driven by balanced growth in the Pharmacy Services and Retail Pharmacy segments.

Pharmacy Services revenues increased 19.2% to $30.4 billion in the reported quarter on growth in the specialty pharmacy business and higher pharmacy network claims.

Pharmacy network claims processed during the quarter went up 23.3% to 282.6 million, backed by net new business growth. Moreover, the continued adoption of Maintenance Choice offerings reached the Mail Choice processed claim count to 22.4 million, up 2.5%.

Revenues from CVS Health’s Retail/LTC improved 12.5% year over year to $20.1 billion, primarily driven by the addition of long-term care (LTC) operations from the Omnicare acquisition, the inclusion of pharmacies and clinics of Target Corporation which was taken over in Dec 2015 and pharmacy same-store sales growth. Same-store sales improved 2.3%, while front-end same-store sales were down 1% year over year.

Front-end same-store sales were impacted by soft customer traffic, which was partially offset by an increase in basket size.

Pharmacy same-store sales increased 3.4% in the reported quarter. Sales were affected approximately 340 basis points (bps) due to recent generic drug introductions. Moreover, Pharmacy same-store prescription volumes rose 3% on a 30-day equivalent basis.

The generic dispensing rate (the proportion of all generic prescriptions to total number of prescriptions dispensed) soared 160 bps to 85.4% at the Pharmacy Services segment and 100 bps to 85.8% at the Retail/LTC segment.

Although gross profit rose 12.4% to $7.4 billion, gross margin contracted 44 bps to 16.7%. Total operating margin during the quarter expanded 28 bps to 6.3% despite a 7.9% increase in operating costs.

CVS Health exited the third quarter of 2016 with cash and cash equivalents and short-term investments of $2.26 billion, compared with $1.21 billion at the end of the second quarter. Year to date, net cash provided by operating activities was $7.94 billion, up 64.1% from the year-ago period.

During the third quarter, CVS Health opened 48 new retail stores and closed 10. Further, the company relocated 11 retail stores. As of Sep 30, 2016, CVS operated 9,694 retail stores, including pharmacies in Target stores across 49 U.S. states, as well as the District of Columbia, Puerto Rico and Brazil.

2016 Guidance Updated

CVS Health has lowered its full-year 2016 earnings expectations. The company currently expects adjusted EPS in the range of $5.77–$5.83 (earlier expectation $5.81–$5.89). The current Zacks Consensus Estimate for earnings is pegged at $5.86 for 2016, above the projected range.

The company however raised its cash flow guidance for 2016. It currently expects to free cash flow of $6.8–$7.0 billion ($6.3–$6.6 billion) and cash flow from operations of $9.3–$9.5 billion ($8.8–$9.1 billion) for 2016.

CVS Health has also issued its fourth-quarter 2016 adjusted EPS projection. The company forecasts adjusted EPS in the range of $1.64−$1.70. The current Zacks Consensus Estimate of $1.79 is above the guided range.

Preliminary 2017 Outlook

The company has issued its full-year 2017 preliminary outlook. Adjusted earnings are expected in the band of $5.77–$5.93. The Zacks Consensus Estimate of $6.53 is above the guided range.

Our Take

CVS Health posted mixed third-quarter results with adjusted EPS beating the Zacks Consensus Estimate and revenues missed the mark. It is also disappointing to see the narrowed guidance which indicates the absence of any near-term catalyst. Nonetheless, year-over-year growth remained impressive with the Pharmacy Services segment benefiting from the upside in the Specialty Pharmacy and the Retail Pharmacy segments.

We take note of the recently completed Omnicare and Target Pharmacy acquisitions, which are currently undergoing the integration process. According to the company, both the acquisitions are strategic fits. CVS Health expects to benefit with multiple opportunities for driving enterprise value from Omnicare and Target in both the near and long term.

Zacks Rank & Key Picks

CVS Health currently has a Zacks Rank #3 (Hold). Better-ranked medical stocks are GW Pharmaceuticals plc , Baxter International Inc. (BAX Quick QuoteBAX - Free Report) and Bovie Medical Corp. . GW Pharmaceuticals and Baxter sport a Zacks Rank #1 (Strong Buy) while Bovie Medical carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

GW Pharmaceuticals surged 71.6% year to date compared to the S&P 500’s 4.3% over the same period. The company has a four-quarter positive average earnings surprise of 41.6%.

Baxter International rallied 26.5% in the past one year, comparing favorably with the S&P 500’s 2.6%. It has a trailing four-quarter average positive earnings surprise of 27%.

Bovie Medical recorded a 153.5% gain in the past one year, way better than the S&P 500’s 2.6%. The company has a trailing four-quarter positive average earnings surprise of 28.7%.

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