CVS Health Corp. :CVS-US: Earnings Analysis: Q4, 2016 By the Numbers : February 10, 2017

CVS Health Corp. reports financial results for the quarter ended December 31, 2016.

We analyze the earnings along side the following peers of CVS Health Corp. – Walgreens Boots Alliance Inc, Rite Aid Corporation and PetMed Express, Inc. (WBA-US, RAD-US and PETS-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 45971 million, Net Earnings of USD 1707 million.
  • Gross margins narrowed from 17.74% to 16.61% compared to the same period last year, operating (EBITDA) margins now 6.78% from 8.17%.
  • Year-on-year change in operating cash flow of -40.60% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings growth from operating margin improvements as well as one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2016-12-31 2016-09-30 2016-06-30 2016-03-31 2015-12-31
Relevant Numbers (Quarterly)
Revenues (mil) 45971 44615 43725 43215 41145
Revenue Growth (%YOY) 11.73 15.45 17.64 18.94 11.04
Earnings (mil) 1707 1534 920 1140 1482
Earnings Growth (%YOY) 15.18 24.72 -27.27 -6.25 12.53
Net Margin (%) 3.71 3.44 2.1 2.64 3.6
EPS 1.59 1.43 0.86 1.04 1.33
Return on Equity (%) 18.76 17.35 10.4 12.45 15.93
Return on Assets (%) 7.24 6.57 3.97 4.9 6.37

Access our Ratings and Scores for CVS Health Corp.

Market Share Versus Profits

Revenues History
Earnings History

CVS-US‘s change in revenue this period compared to the same period last year of 11.73% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that CVS-US is holding onto its market share. Also, for comparison purposes, revenues changed by 3.04% and earnings by 11.28% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Leader, Earnings Focus, Laggard, Revenues Focus

Earnings Growth Analysis

The company’s earnings rose year-on-year. But this growth has not come as a result of improvement in gross margins or any cost control activities in its operations. Gross margins went from 16.61% to 17.74% for the same period last year, while operating margins (EBITDA margins) went from 6.78% to 8.17% over the same time frame.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

CVS-US‘s decline in gross margins were offset by some improvements on the balance sheet. The management of working capital, for example, shows progress. The company’s working capital days have fallen to 8.90 days from 18.28 days for the same period last year. This leads Capital Cube to conclude that the gross margin decline is not altogether bad.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich

Cash Versus Earnings – Sustainable Performance?

CVS-US‘s change in operating cash flow of -40.60% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

The company’s earnings growth has also been influenced by the following factors: (1) Improvements in operating (EBIT) margins from 6.76% to 6.78% and (2) one-time items. The company’s pretax margins are now 5.99% compared to 5.96% for the same period last year.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

Access our Ratings and Scores for CVS Health Corp.

Company Profile

CVS Health Corp. engages in the provision of health care services. It operates trough the following segments: Pharmacy Services, Retail or Long Term Care, and Corporate. The Pharmacy Services segment offers pharmacy benefit management solutions. The Retail or Long Term Care segment includes selling of prescription drugs and assortment of general merchandise. The Corporate segment involves in providing management and administrative services. The company was founded by Stanley P. Goldstein and Ralph Hoagland in 1963 and is headquartered in Woonsocket, RI.

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