Pharmacy services giant CVS Health (CVS) announced good-looking second quarter financial figures just before opening bell Tuesday, but the market still found something wrong, sending the stock down 3%.
For the second quarter, net revenues clocked in at $37.2 billion, a 7.4% improvement over the prior year. Net income increased by 2.1% from last year’s second quarter to $1.3 billion.
As for the third-quarter outlook, CVS only expects earnings between $1.27 per share and $1.30, versus the $1.37 expected by analysts according to Thomson Reuters. For the full year, CVS now expects EPS between $5.11 and $5.18, versus the previous guidance of $5.08 to $5.19.
We can trace the negative reaction to CVS stock earnings down to two factors. First, CVS stock narrowed its guidance for the third quarter and for the entire 2015. Second, CVS Health’s front store figures were not encouraging. And I think this is due to the reminder of what CVS has got itself into by removing tobacco from its shelves, a roughly $2 billion component of CVS stock’s previous earnings.
However, the front store is actually not that bad. The company said:
“On a comparable basis, front store same store sales would have been approximately 780 basis points higher if tobacco and the estimated associated basket sales were excluded from the three months ended June 30, 2014.”
CVS Stocks’ New Direction
The fact that CVS would have found improvement amid “softer customer traffic” is impressive. In addition, investors should appreciate the fact that CVS front stores are recording higher basket size with higher margins even when tobacco been removed.
One thing we have to remember, though, is that the decision to take tobacco off its shelves is meant to help the company achieve its long-term objectives in healthcare services. CVS wanted to present itself as a company that promotes healthy living in the post-Affordable Healthcare Act era, an image that wouldn’t hold up with tobacco still on its shelves.
Over the long-term, this move will improve the company’s resume when bidding for new business opportunities. And I believe CVS stock is already seeing the benefit, which the CEO saying that they “have won significant net new business”
In addition, the image of CVS stock among Americans should shoot up. Here’s why: America’s aging population is on the rise, and the use of prescription drugs is rising with it. Now, with CVS trying to tell customers that it truly cares about their health, aging Americans, who actually want be healthy would tend towards CVS Health services.
Apart from good tobacco PR move, the company has been positioning itself to benefit from the new consumer-directed realities of the healthcare industry with the proposed acquisition of Ominicare and Target’s (TGT) pharmacies and clinics.
Moreover, we have to remember that the growing trend toward high-deductible healthcare plans from employers will push more consumers be more cost-sensitive going forward. CVS stock is well positioned to take advantage of this trend with its growing retail clinics. After all, retail clinics are cheaper than visiting a physician’s office.
Overall, CVS stock’s stand against tobacco, even if damage to CVS earnings in the near term, will stand its favor in just about any situation over the long term.
CVS stock has solid long-term fundamentals, and it won’t be out of place in your healthcare portfolio.
As of this writing, Craig Adeyanju did not hold a position in any of the aforementioned securities.
