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CVS Health (CVS) Retail Business Grows Despite Cost Pressure

Increasing demand for Pharmacy Benefit Management (PBM) and specialty pharmacy along with strong digitization of business is a key driver of CVS Health’s CVS persistent growth amid the pandemic-induced challenges. The company currently carries a Zacks Rank #3 (Hold).

Over the past year, CVS Health has outperformed its industry. The stock has gained 46.2% compared with the 40.8% rise of the industry.

CVS Health's second-quarter earnings and revenues surpassed the respective Zacks Consensus Estimate. Revenues across all the three operating segments improved in the quarter. Pharmacy services revenue growth of 9.8% outperformed the company’s expectations. Operating income also rose significantly. Specialty pharmacy revenues were up 8.9% year over year. The company added nearly 1 million new integrated pharmacy and medical members through the 2021 and 2022 selling seasons.

Retail reported above-market growth also exceeded the company’s expectations. Prescription market share was over 26%. There was a solid rebound in front-store sales, which increased nearly 13% in the quarter, on strength across all categories. One-third of pharmacy script growth was attributable to COVID-19 vaccines.

Healthcare benefits results were strong driven by growth in government business. While the medical benefit ratio of 84.1% was modestly above expectations due to COVID-related costs, underlying non-COVID costs dropped.

CVS Health Corporation Price

CVS Health Corporation Price
CVS Health Corporation Price

CVS Health Corporation price | CVS Health Corporation Quote

The company noted that the consumer-centric digital strategy is more relevant in the current environment as people are using technology while staying indoors. In the second quarter, digital retail customers spent 2.5 times more in front store, managed 1.5 times more scripts, and continued to remain as customers longer than other pharmacy patients. Its increased full-year guidance indicates that this bullish trendis likely to continue through the rest of 2021.

CVS Health continues to believe that aggregate medical costs will modestly exceed baseline levels during the second half of 2021. In addition to the strong performance in the core business, the company is benefiting from the broad and unique portfolio of assets with the first CVS-Aetna co-branded offerings.

The company also announced that it will re-enter the public exchanges in 2022. CVS Health currently expects to enter up to eight states, where it expects to make a meaningful impact and maximize returns with this first-ever Aetna-CVS branded offerings.

On the flip side, CVS Health’s second-quarter adjusted earnings declined year over year on escalating costs and expenses, which are putting pressure on both the margins. Total cost (including Benefit Cost) rose 14.3%. Gross profit fell 1.1%. Gross margin contracted 226 basis points (bps) to 18.2%. The operating margin in the quarter under review fell 121 bps to 5.9% on a 7.6% decline in operating profit.

Further, within Retail/Long Term Care (LTC), the company is facing continued reimbursement pressure and the impact of recent generic introductions. A highly competitive landscape poses stiff challenges to CVS Health.

Key Picks

A few better-ranked stocks from the Medical-Products industry are Envista Holdings Corporation NVST, VAREX IMAGING VREX, and BellRing Brands, Inc. BRBR.

Envista Holdings, which carries a Zacks Rank #1 (Strong Buy), has a long-term earnings growth rate of 27.4%. You can see the complete list of today’s Zacks #1 Rank stocks here.

VAREX, carrying a Zacks Rank #2 (Buy), has a long-term earnings growth rate of 5%.

BellRing Brands, with a Zacks Rank #2, has a long-term earnings growth rate of 29.1%.


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CVS Health Corporation (CVS) : Free Stock Analysis Report

VAREX IMAGING (VREX) : Free Stock Analysis Report

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BellRing Brands, Inc. (BRBR) : Free Stock Analysis Report

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