CVS: Keep It Simple

| About: CVS Health (CVS)


Today, I will revisit CVS Health, whose stock has pulled back to the lower $90 range.

Q2 earnings are out and I discuss the results and where I see the name going.

What to look for in the second half of 2016.

Keep it simple. Sometimes these words of wisdom should be kept in mind when investing. Today, I will revisit CVS Health (NYSE:CVS), which has really grown to be more than a pharmacy as it now has 1,000 walk-in medical clinics offering check-ups, screenings and immunizations, among other services. On top of that, CVS Health is a leading pharmacy benefits manager and now has over 70 million members in its pharmacy benefit plan. You may recall that back when the market knocked shares down to $90 a share, I said shares were a strong buy. Shares then rose to well over $100. Now they are back to the lower $90 range.

Keep it simple. Buy on dips, sell on rips. Don't buy or sell all at once, do it in phases. This is the recipe for long-term success. As far as CVS goes it has been in a nice trading around the core position situation for years. This morning's earnings report offers evidence that the company continues to fire on all cylinders. In fact, the report demonstrates continued strength coming out of the company and that it is performing in line with its guidance for growth and is actually surpassing consensus expectations, at least on the bottom line.

The retail numbers continue to impress. Revenues in this segment increased 16% year-over-year, or $2.8 billion, to $20 billion in Q2 2016. Same-store sales increased 2.1% year-over-year. I also should report that pharmacy same-store sales were up 3.9% but front store same-store sales were down 2.5% year-over-year. Front store same store sales were negatively affected by softer customer traffic, partially offset by an increase in basket size and the shift of Easter from April in 2015 to March in 2016, which positively affected front store same store sales by approximately 80 basis points. Front store same store sales also were also impacted by the move in the Easter holiday into March this year.

Despite retail sales making up a massive portion of revenues, CVS pharmacy services continue to grow revenues. In fact, revenues here jumped 20.7%, or $5.1 billion, to $29.5 billion in Q2 2016. Much of this came from higher pharmacy network claims as well as some growth in specialty pharmacy. These network claims increased 22.6% to 280.5 million compared to 228.8 million a year ago. Once again, much of this increase was due to growth in Managed Medicaid and public exchanges as well as new customers. Mail choice claims processed also rose year-over-year in Q2 2016. Volume increased 3.9% to 22.2 million, compared to 21.3 million in Q2 2015, mostly due to specialty claim volume and continued adoption of CVS' Maintenance Choice offerings.

Combining all of the sales data, we see that net revenues were up 17.6% to a record $43.7 billion. This also is up nicely quarter-over-quarter as revenues came in at $43.2 billion for Q1 2016. Factoring in expenses, net income actually declined 27% to $0.9 billion compared to last year. Why? This decrease stems from higher interest expense as well as merger and acquisition costs, in addition to a loss from an early payoff of debt of $542 million. This translates to $0.86 in earnings, up from the $1.12 last year. Factoring in adjustments to the GAAP net income, adjusted earnings were $1.32, rising 8% year-over-year. The earnings surpassed expectations by $0.02.

Looking ahead to the second half of 2016, the company has narrowed and raised its earnings guidance. It now sees adjusted earnings per share coming in at $5.81 to $5.89, up from $5.73 to $5.88. I should point out it lowered GAAP earnings expectations thanks to the hit this quarter from debt retirement. The Q3 2016 adjusted earnings projections are for $1.55 to $1.58. Further, 2016 free cash flow will be $6.3 to $6.6 billion, up from $5.3 to $5.6 billion, which is incredibly solid. Factoring in dividends and share repurchases, the company has returned significant value to shareholders in 2016. Keep it simple. Buy this dip. If you can get shares under $90, that is an incredible entry point. Look to trim above $100.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles that are time sensitive. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.