Why CVS Stock Looks Strong Ahead of Q3 Earnings

  • CVS Health is set to report its third-quarter earnings results tomorrow.
  • We think CVS sustained its sales growth momentum in Q3 and could beat analysts’ estimate, with Aetna acting as a growth catalyst.

CVS Health (CVS) is slated to announce its third-quarter earnings results tomorrow. We believe the company sustained its sales momentum in the quarter, with Aetna driving most growth. The stellar sales growth could continue to drive CVS stock’s recovery.

CVS Health’s sales and earnings grew strongly in this year’s first half, primarily due to its acquisition of Aetna. In the third quarter, we expect the company to maintain the 35% revenue growth it saw in the first half, driven by incremental revenue from Aetna.

We think prescription volumes and branded drug inflation could boost revenue for CVS Health, as well as Walgreens (WBA). However, higher generic dispensing and price compression could continue to hurt revenue.

The Aetna acquisition could continue to boost CVS Health’s operating income and earnings. However, we expect the company’s earnings growth to soften, reflecting reimbursement pressure, higher wages and interest expenses, and a higher outstanding share count.

Analysts’ estimate for Q3

In the third quarter, analysts expect CVS Health’s revenue to grow 33% YoY (year-over-year) to $63.01 billion, boosted by its Aetna acquisition. Its retail sales and focus on clinical care programs and network relationships could also drive revenue.

Analysts expect CVS Health’s adjusted EPS to grow about 2% YoY to $1.77 in the third quarter, supported by higher sales and operating income. However, continued pressure from a higher outstanding share count, interest expenses, and reimbursements could take a toll on profitability.

Higher reimbursements have also impacted Walgreens’s margins and EPS. During its last reported quarter, Walgreens’ adjusted EPS fell 3.7% YoY (year-over-year), reflecting reimbursement pressure and higher labor costs and investments in digital initiatives and stores. However, the company’s revenue and EPS beat Wall Street’s expectations.

We think CVS Health could surpass analysts’ EPS estimate despite its margin pressure. Notably, the company has beaten their earnings expectations in the last six quarters.

CVS stock recovers

CVS stock has improved greatly since the company reported its second-quarter earnings results on August 7. The stock has risen about 26% since then and is up about 4% year-to-date. CVS Health’s third-quarter results could boost its stock further.

In comparison, Walgreens stock is down about 13% this year. However, WBA stock has also recovered, by about 7%, since the company’s better-than-expected earnings release on October 28.