CVS Health Corp: Earnings Preview

By Markets Fool.com

Image source: Getty Images.

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Pharmacyretail giant CVS Health(NYSE: CVS)is on deck to report results from its second quarter on Tuesday, August 2nd, before the market opens. CVS Health is coming off arecord-breakingquarter where sales jumped by nearly 19%, so investors will want to know if the company was able to keep the momentum going in the second quarter.

Below is a preview of what the company has forecasted for the upcoming quarter, along with a list of six key questions I think need to be answered.

Stats on CVS Health

Market Cap

$104 billion

Trailing P/E Ratio

21.1

Forward P/E Ratio

16.2

Dividend Yield

1.75%

Data source: Yahoo! Finance.

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Can the company beat its forecast yet again?

Each quarter, CVS Health's management team shares their expectations for the upcoming quarter with Wall Street, and history shows that this guidance is usually quite accurate.

For the second quarter, the company is projecting revenue growth of at least 18.5%, which is consistent with what we saw in the first quarter. Adjusted earnings per share are projected to land between $1.28 and $1.31, which represents modest growth over the $1.22 per share it recorded in the year-ago period.

Last quarter, the company had no problem coming in ahead of its own guidance. Can they repeat that feat in the second quarter?

How are margins holding up?

You may have noticed there's a big gap between the company's expected revenue growth rate and its earnings-per-share growth rate. The difference is because the company is seeing downward pressure on its margins at the moment.

Last quarter, management explain that they margins are being influenced by one-time factors like acquisition costs, plus from general reimbursement pressure within the marketplace. When combined, those factors caused the company's operating margin to drop about 70 basis points last quarter, coming in at 5.2%.

Will we see an uptick in margins this quarter, or is this lower-margin profile here to stay?

Image source: CVS Health.

Do customers still love its pharmacy benefits management business?

Most investors associate CVS Health with its retail empire, but the company's PBM business actually generates the majority of overall revenue. In its role as a PBM, CVS is the middle-man between healthcare producers and payers.

Last quarter the company had a lot of good data to share related to itsPBM business. Management recorded net new business of $13.1 billion, which is great start to the year. Importantly, the company reported a client retention rate that was north of 97% last quarter, a truly stunning figure.

CVS Health indicated that the 2017 selling season was looking strong. As of April roughly one-third of clients had already renewed, which is a typical result given the time of year. Management also stated that request-for-proposals were up versus the prior year, which hints that this division should continue to grow at impressive rates into the near future.

Did the company's PBM business continue to win new business during the quarter?

Same-store sales heading higher?

Every retail investor knows they need to keep tabs on how legacy stores are performing, and the key metric to watch there is same-store sales.

Last quarter, CVS Health put up a great result, showing a total same-store sale increase of 4.2%. However, that number was a bit deceiving since it was juiced by 125 basis points thanks to an extra day from the inclusion of leap year. The company won't have that working in its favor this quarter.

Did same-store sales grow yet again?

Is the Target pharmacy conversion finally complete?

In 2015, CVS Health shelled out $1.9 billion toacquireTarget's pharmacyand clinic business. The move single-handedly added 1,660 pharmacy locations to the company's footprint, growing its store base by about 20%.

Ever since the deal closed in December, the company has been working on rebranding all of theTarget pharmacies. Last quarter, management stated that all of the work would be completed by "the end of the summer," so we should be getting quite close to completion by now.

The reason this is worth watching is because CVS Health is holding back on marketing to Target's customers until after the conversion is fully completed. Since this is a big opportunity for the company to bring in new customers to its stores, investors will want to hear from management that the conversion is nearing completion.

Things still looking good for the full year?

Finally, investors should listen in to see if the company is still on track to meet its full-year targets.Previously, management was calling forrevenue growth in a range of 17.5% to 19%, while adjusted earnings-per-share was expected to grow at least 11%, landing between $5.73 to $5.88.

That guidance implies the margin profile will get better in the back half of the year, plus that the company will execute on its plan to buy back $4 billion worth of stock.

Is everything still on track, or will this guidance need to be tweaked?

We'll have our answers to all of these questions in just a few days' time.

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Brian Feroldi has no position in any stocks mentioned.Like this article? Follow him onTwitter where he goes by the handle@Longtermmindsetor connect with him on LinkedIn to see more articles like this.

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