CVS Health Q1 Profit Down but Better Than Expected After Major Contract Losses

By Keith Speights Markets Fool.com

CVS Health (NYSE: CVS) lowered expectations for 2017 after losing two major contracts last year. The giant pharmacy retailer and services company also faced other challenges in the early months of the year, particularly.

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The company reported its first-quarter financial results before the market opened on Tuesday. Was CVS Health able to overcome most of its challenges? Here are the highlights.

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CVS Health results: The raw numbers

Metric

Q1 2017

Q1 2016

Year-Over-Year Change

Net revenue

$44.5 billion $43.2 billion

3%

Net income from continuing operations

$953 million $1.1 billion

(16.9%)

Adjusted EPS

$1.17 $1.18

(0.8%)

Data Source: CVS Health.

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What happened with CVS Health this quarter?

CVS Health had both good news and bad news when it came to revenue in the first quarter. Revenue for its pharmacy services segment increased 8.5% year over year to $31.2 billion. However, retail/long-term care (LTC) segment revenue decreased 3.8% from the prior year period to $19.3 billion.

The higher pharmacy services segment revenue stemmed from increasedpharmacy network claim volume as well as higher prices for brand drugs and growth in specialty pharmacy. Higher pharmacy network claim volume was due primarily to CVS Health winning new pharmacy benefits management (PBM) business.

Retail/LTC segment revenue was hurt by a 4.7% decrease in same-store sales,continued reimbursement pressure, and a higher generic dispensing rate. The same-store sales decline came in part as a result of launches of new generic drugs. However, CVS Health's loss of the Tricare and Prime Therapeutics contracts to Walgreens Boots Alliance (NASDAQ: WBA) took a heavy toll as well. In addition, the absence of a leap day in the first quarter of 2017 contributed to a negative year-over-year comparison.

CVS Health's earnings decline in the first quarter was due primarily to the losses of contracts to Walgreens. Price compression for its pharmacy services segment and reimbursement pressure for the retail/LTC segment also were factors in the lower first-quarter earnings. However, the company's first-quarter earnings results came in higher than what CVS Health had previously projected for the quarter.

During the first quarter, CVS Health closed 60 retail stores and opened 27 new retail stores, for a net reduction of 47. The company also relocated 10 retail stores. As of March 31, 2017, CVS Healthoperated 9,676 retail stores across49 states, the District of Columbia, Puerto Rico, and Brazil.

What management had to say

CVS Health CEO Larry Merlo said, "2017 is off to a solid start as we posted results this quarter that surpassed our expectations. At the same time, we generated $3.1 billion of free cash and continued to return value to our shareholders through high-return investments in our business as well as dividends and share repurchases. However, while we are pleased with our financial performance versus our expectations, we won't be satisfied until the company returns to sustainable, healthy earnings growth."

Merlo added, "We continue to expect 2017 to be a rebuilding year, but our goals remain clear, and we fully intend to return to healthy levels of growth. We remain confident in our model as well as our position in the evolving healthcare landscape, and our ability to generate significant levels of cash will continue to play an important role in driving shareholder value over the longer term."

Looking forward

CVS Health confirmed its previous guidance for full-year 2017. The company still expects GAAP (generally accepted accounting principles) diluted earnings per share between $5.02 and $5.18 for 2017, with adjusted earnings per share of $5.77 to $5.93. CVS Health also projects full-year 2017 operating cash flow between $7.7 billion and $8.6 billion, with free cash flow of $6 billion to $6.4 billion.

The company also provided guidance for the second quarter of 2017. CVS Health expectsGAAP diluted earnings per share of $1.15 to $1.19 in the second-quarter. Adjusted earnings per share during the quarter are projected to come in between $1.29 and $1.33.

As Larry Merlo said, this will be a rebuilding year for CVS Health. It will take some time for the company to rebound from the losses of the Tricare and Prime Therapeutics contracts to Walgreens. However, the company remains in solid financial shape and is in position to continue rewarding shareholders with higher dividends and stock buybacks.

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Keith Speights has no position in any stocks mentioned. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.