Source: CVS Health

On Tuesday, CVS Health (NYSE:CVS) delivered strong results for the third quarter of 2014. While the numbers were not particularly explosive in comparison to expectations, performance was solid across the board. Let's take a look at the latest earnings report from CVS Health and the main takeaways for investors.

Growing sales
Net sales during the quarter ended on Sept. 30, 2014, and increased 9.7% versus the same quarter in the prior year to $35 billion. The number came in above the $34.75 billion in revenues forecasted on average by Wall Street analysts for the quarter according to data compiled by Thomson Reuters.

Revenues in the pharmacy services segment increased 15.7% to $22.5 billion, while sales in the retail pharmacy segment grew 3.1% to $16.7 billion in the quarter. Same-store sales increased 2% versus the third quarter of last year, with pharmacy same-store sales up 4.8% and front store same-store sales down 4.5%.

CVS has decided to stop selling tobacco in order to better focus on health services and strengthen its image among both consumers and healthcare partners. While this is a smart decision from a long term point of view, it's having a negative impact on sales in the short term due to the loss sales of both tobacco and other products that customers grab from the shelves while they are at the store to get their smokes.

Management estimates that front store same-store sales would have been approximately 480 basis points higher if tobacco and the estimated associated basket sales were excluded from the three months ended Sept. 30, 2014, and 2013.

The generic dispensing rate increased approximately 180 basis points in both the pharmacy services segment and retail pharmacy segment, to 82.5% and 83.3%, respectively.

Solid earnings
Reported net income during the quarter decreased 24.1%, primarily due to a $521 million pretax loss on the early extinguishment of debt. Excluding the loss on early extinguishment of debt and a $72 million pretax gain from a legal settlement in 2013, net income increased 5% year over year.

Adjusted earnings per share increased 9% to $1.15 during the quarter; the number was above Wall Street's expectations of $1.13 in earnings per share.

CVS reduced its average diluted share count by 5% versus the third quarter in 2013, so share buybacks are becoming an important growth factor as the company is reducing its share count and accelerating earnings-per-share growth.

Cash flows are moving in the right direction, too. Operating cash flow grew 11% to $4.7 billion in the first nine months of the year, while free cash flow jumped 17% year over year to $3.6 billion during the period.

CVS returned more than $3.7 billion to shareholders via dividends and buybacks year to date, and management believes it's on track to distributing over $5 billion during the full year 2014.

Optimistic guidance
President and CEO Larry Merlo sounded clearly satisfied with performance during the quarter:

I'm very pleased with our strong results in the third quarter, which reflect better-than-expected revenue growth across the enterprise and expanding retail gross margins. The 2015 PBM-pharmacy benefit management-selling season continued to be highly successful with a significant number of new business wins across all lines of business.

CVS narrowed its earnings guidance range for the full year 2014, the company expects to deliver adjusted earnings per share in the range of $4.47 to $4.50, versus a prior estimate of $4.43 to $4.51.

Free cash flow guidance range was raised to $5.7 billion to $6.0 billion, from $5.5 billion to $5.8 billion. The company also increased its cash flow from operations guidance range to $7.4 billion to $7.7 billion, from a previous range of $7.2 billion to $7.5 billion.

CVS expects adjusted earnings in the fourth quarter of the year to be between $1.18 and $1.21, while Wall Street analysts are on average forecasting earnings per share at the top end of that range, at $1.21 per share, during the fourth quarter.

The bottom line
Both sales and earnings came in above expectations, and the company is producing abundant cash flows and rewarding investors with generous dividends and buybacks. Forward-looking guidance was also quite encouraging, so the latest earnings release from CVS Health shows that the company is performing well across the board.