It's been a pretty rough year for CVS Health (CVS +0.66%). Even though the giant pharmacy services company beat earnings estimates in each of the first three quarters of 2016, shares are down around 18% due to significant problems that arose in the latter part of the year. Are those problems enough to make 2017 CVS Health's worst year yet?
Image source: CVS Health.
A heated rivalry
Investors initially expected CVS Health to report strong earnings growth for both the fourth quarter of 2016 and full-year 2017. That changed, however, after a couple of big developments in the company's heated rivalry with Walgreens Boots Alliance (WBA +0.00%).
First, Walgreens landed Prime Therapeutics' business. This was an important account, since Prime is the fourth-largest pharmacy benefits manager (PBM) in the country and is owned by 14 Blue Cross and Blue Shield plans. With this win, 22 million of Prime's members will be steered toward Walgreens' pharmacies rather than CVS.
Second, Walgreens replaced CVS in Tricare's pharmacy network. Tricare provides health coverage to 9.4 million members of active-duty and retired military personnel and their families.
Although Walgreens' Tricare deal was announced after the Prime Therapeutics win, it has the more immediate impact for CVS Health. Walgreens joined Tricare's network effective Dec. 1, pushing CVS out of the picture. The Prime Therapeutics change becomes effective on Jan. 1, 2017.
As a result of these pharmacy network changes, CVS Health expects its retail profit margin to decrease next year. The Tricare impact was significant enough to shave $0.05 off CVS Health's midpoint of projected earnings per share for full-year 2016.
Potential positives
Despite these major losses to Walgreens, CVS Health still has several positive things going for it. The company thinks that it will be able to grow earnings by an average 10% annually over the next several years.
The key to achieving this goal will be sustained momentum for CVS Health's pharmacy services business. Sales for the segment jumped over 19% year over year in the third quarter. CVS continues to attract new business for its PBM and is seeing especially strong growth with its specialty pharmacy.
New product offerings could also help. CVS Health intends to launch a new suite of bundled services that leverage its wide array of options. The company envisions offerings that could potentially include MinuteClinic services, infusion services, and long-term care services (from Omnicare).
Investors should continue to enjoy solid dividend payments. The dividend yield currently stands at 2.14%. That seems likely to increase in the future, since CVS has committed to raising dividends each year.
There's also the possibility of an acquisition or two. CVS Health CEO Larry Merlo has alluded to the potential for future deals in past comments. It wouldn't be surprising to see the company buy one or more smaller specialty pharmacies.
Worst year yet?
I doubt 2017 will be the company's worst year yet. Consider CVS' history. In 2001, the stock lost nearly half of its value. CVS' shares dropped 27% during the financial crisis of 2008. CVS has seen back-to-back yearly declines only once this century.
All of the recent bad news for the company is already baked into the current share price. The 2017 selling season is over. There shouldn't be any other unpleasant surprises that would be big enough to move the needle much.
Having said that, I don't look for 2017 to necessarily be a great year for CVS Health, either. The company has too many challenges ahead of it in the near term. I think that CVS Health will remain a solid pick over the long run, though. Double-digit percentage annual growth combined with an increasing dividend yield should be attractive for many investors.
