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Key Takeaways from CVS Health’s 3Q17 Earnings

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Part 3
Key Takeaways from CVS Health’s 3Q17 Earnings PART 3 OF 5

What Drove Down CVS Health’s Q3 Bottom Line?

CVS Health’s 3Q17 bottom line

As we’ve discussed, CVS Health (CVS) cruised ahead of Wall Street’s bottom-line expectations when it reported its third-quarter results on November 6.

While earnings per share fell 5.7% YoY (year-over-year) to $1.50, they were 2 cents more than consensus expectations. This was the eight consecutive earnings beat for CVS.

“The solid third quarter results we posted today keep us well on track to achieve our full-year targets,” commented Larry Merlo, president and CEO of CVS Health. “While operating profit in the Retail/LTC Segment was impacted by the devastating hurricanes, operating profit in the Pharmacy Services Segment was in line with expectations. At the same time, we continued to deliver substantial free cash flow and return significant value to our shareholders through dividends and share repurchases.” 

Rival Walgreens Boots Alliance (WBA), which reported its results at the end of October, also reported a better-than-expected bottom line. Its adjusted earnings per share rose 22.4% YoY to $1.31, outperforming consensus by 10 cents. The Illinois-based pharmacy giant hasn’t missed consensus forecasts in the last 13 quarters.

What Drove Down CVS Health’s Q3 Bottom Line?

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Margins worsen in Q3: Here’s why

Gross profit fell 4.9% YoY during the quarter, mainly due to the ongoing network restrictions in the retail segment and continued pricing and reimbursement pressures. Gross margin was down 135 basis points to 15.4% of sales, due mainly to the increasing share of the lower-margin PBM (pharmacy benefits management) business.

Operating margin declined by 105 basis points to 5.4% as operating profits fell 11.5%, to $2.5 billion during the quarter. This decline was driven by a gross margin contraction, the shift in timing of Medicare Part D profits, and the negative impact of hurricanes that hit the southern United States and Puerto Rico. CVS incurred $55 million in hurricane-related expenses during the quarter.

Read the next part of this series to learn the segmental margins during the quarter.

Investors looking for exposure to CVS through ETFs can invest in the Van Eck Retail ETF (RTH). CVS makes up 5.1% of RTH.

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