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Why CVS Health Corp Stock Is Falling Today

By Todd Campbell – Nov 8, 2016 at 1:49PM

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The pharmacy retail and benefits manager's new financial guidance failed to inspire investors.

Image source: CVS Health Corp.

What happened

After updating investors on its third-quarter progress and lowering its guidance, shares in CVS Health Corporation (CVS 0.69%) are down 12.7% as of 1:35 p.m. EST.

So what

The pharmacy retail and benefits manager reported solid double-digit top- and bottom-line growth in the third quarter; however, a warning for lower-than-expected profitability due to stiff competition derailed optimism and drove shares lower.

In the quarter, CVS Health's net sales popped 15.5% from a year ago to $44.6 billion, while GAAP diluted EPS improved 30.3% to $1.43. Net sales benefited from double-digit sales growth in its pharmacy benefit manager business and its long-term care/retail business. Pharmacy benefit segment sales increased 19.2% to $30.4 billion, and long-term care/retail sales increased 12.5% to approximately $20.1 billion.

Pharmacy benefit revenue improved due to net new business from insurers and companies eager to crimp runaway drug costs, and long-term care/retail revenue grew thanks to the acquisition of Omnicare and Target's in-store pharmacies.

Despite the solid results, management offered up a cautious view for this year and 2017. CVS Health now expects full-year GAAP diluted EPS of between $4.84 and $4.90, down from $4.92 to $5.00 previously. Next year, the company expects GAAP diluted EPS of $5.16 to $5.33 and adjusted EPS of $5.77 to $5.93. Those estimates are below industry watchers' current predictions. 

Now what

As healthcare payers attempt to shore up their own finances, they're increasingly leveraging for concessions from their pharmacy benefit managers. Facing stiff competition from Express Scripts, the largest of the pharmacy benefit operators, and Walgreens, the largest pharmacy retailer, it's not surprising that there's some client turnover. 

CVS Health estimates that its competitors' wins will shift 40 million retail prescriptions away from it next year. That will create a significant headwind in the short term; however, investors might want to focus more attention on the long-term opportunities ahead for this company. After all, CVS Health remains a dominant player in this industry, and long-tail demand for its products and services is growing, not shrinking, because of a larger and longer-living America.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. Like this article? Follow him on Twitter where he goes by the handle @ebcapital to see more articles like this. The Motley Fool owns shares of Express Scripts. The Motley Fool recommends CVS Health. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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