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CVS Health’s Financial Performance in 2015

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Financial performance overview of 1Q15

As we saw in Part 1 of this series, CVS Health (CVS) will declare its 2Q15 earnings on August 4. The company posted a strong financial performance in 1Q15. Adjusted EPS in 1Q15 grew 12.2% year-over-year to $1.14. CVS Health also came in ahead of its own guidance by a long margin. The company beat its own adjusted EPS projections by $0.05 per share and Wall Street consensus analyst estimates by ~$0.06 per share.

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Revenue growth

CVS’s revenue grew 11.1% year-over-year in 1Q15 to $36.3 billion. Sales growth came about through both its Pharmacy Services and Retail Pharmacy segments. In contrast, peers Walgreens Boots Alliance (WBA) and Diplomat Pharmacy (DPLO) reported sales of $28.8 billion and $624 million, respectively, in their last quarters.

Profitability

CVS’s operating profit margin dipped in 1Q15 to 5.9%, compared to 6.2% in 1Q14. The unfavorable comparison partly stemmed from lower reimbursement rates and slight shifts in the sales mix toward lower profitability businesses.

The deleveraging in margins was partially offset by profitability improvement stemming from the removal of tobacco products, economies of scale in purchasing, and a higher generic dispensing rate (or GDR) in both segments.

CVS’s GDR at more than 80% for both segments is one of the best in the industry. It’s a key profitability driver for CVS, as generic drug sales typically earn higher margins. You’ll read more detailed profitability analysis in Parts 3, 4, and 7 of this series.

Segments overview

CVS operates in two segments: Pharmacy Services and Pharmacy Retail. Pharmacy Services provides pharmacy benefit management (or PBM) services to customers, including employers, managed Medicaid plans, and health plan sponsors. Pharmacy Retail includes the sale of prescription and OTC (over-the-counter) drugs, beauty and personal care products, and more. You’ll read a more detailed analysis of CVS’s segments and their drivers in Parts 3 and 4 of this series.

CVS is the top holding in the First Trust Consumer Staples AlphaDEX ETF (FXG) with a 4.9% weight. It’s also part of the PowerShares S&P 500 Low Volatility ETF (SPLV) with a 1.1% weight.

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