Why Is CVS Health (CVS) Down 1.9% Since Last Earnings Report?

A month has gone by since the last earnings report for CVS Health (CVS). Shares have lost about 1.9% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is CVS Health due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

CVS Health Q2 Earnings Beat Estimates, Margins Down

CVS Health Corporation's second-quarter 2022 adjusted earnings per share of $2.40 dropped 0.8% year over year and exceeded the Zacks Consensus Estimate by 11.1%. The adjusted earnings per share figure considers certain asset amortization costs, acquisition-related integration costs and other adjustments.

Our model projected an adjusted earnings per share of $2.14 in Q2.

On a reported basis, the company’s GAAP earnings per share of $2.23 rose 6.2% year over year.

Total revenues in the second quarter rose 11% year over year to $80.64 billion. The top line also beat the Zacks Consensus Estimate by 5.3%.

The second-quarter revenue compares to our own estimate of $76.68 billion.

Quarter in Detail

Pharmacy Services revenues were up 11.7% to $42.81 billion in the reported quarter. The upside was primarily driven by increased pharmacy claims volume, growth in specialty pharmacy and brand inflation, partially offset by continued client price improvements.

For the Pharmacy Services segment, we projected $41.14 billion of revenues in the second quarter.

Total pharmacy claims processed rose 3.9% on a 30-day equivalent basis, attributable to strong net new business, greater utilization and extension of the cough, cold, and flu season compared to the previous year, partially offset by lower COVID-19 vaccinations. Without considering the COVID-19 vaccinations, total pharmacy claims processed increased by 5.7% on a 30-day equivalent basis.

Revenues from CVS Health’s Retail/LTC segment were up 6.3% year over year to $26.29 billion. The impressive growth was driven by increased prescription and front store volume, including the sale of COVID-19 OTC test kits and the impact of an extended cough, cold and flu season versus the prior year and pharmacy brand inflation. However, this growth was partially offset by recent generic introductions, persistent pharmacy reimbursement pressure and a decline in COVID-19 vaccinations and diagnostic testing.

This figure compares with our Retail/LTC revenue estimate of $24.63 billion for Q2.

Within the Health Care Benefits segment, the company registered revenues worth $22.76 billion in the second quarter, up 10.9% year over year. The upside was primarily driven by growth across all product lines. The segment also benefited from favorable development of the prior years’ health care cost estimates in its Government Services and Commercial businesses.

For Health Care Benefits segment, we projected $22.44 billion of revenues in the second quarter.

Margin

Total cost (including Benefit Costs) rose 12.6% to $66.89 billion in the second quarter. Gross profit rose 4.1% to $13.74 billion. The gross margin contracted 113 basis points (bps) to 17%.

We projected an adjusted gross margin of 18% for Q2.

The operating margin in the quarter under review contracted 29 bps to 5.7%, with a 5.6% surge in operating profit to $4.57 billion.

The adjusted operating margin, according to our model, was 5.7% for Q2.

2022 Guidance

CVS Health updated its EPS guidance for full-year 2022.

The company currently expects adjusted EPS in the band of $8.40-$8.60 (up from the earlier projected $8.20-$8.40). The Zacks Consensus Estimate for 2022 earnings is pegged at $8.23.

The company has also updated its full-year operating cash flow projection in the range of $12.5-$13.5 billion (up from the prior projection of $12.0-$13.0 billion).

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

Currently, CVS Health has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, CVS Health has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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