CVS beats earnings expectations amid potential Aetna tie-up

Key Points
  • CVS Health has been struggling in its front-of-store business, as it loses sales to competitors.
  • The drugstore chain has been moving further into the pharmacy business.
  • Its business also has been pressured by an increase in generic drugs.
  • CVS Health beat analyst expectations and narrowed its financial forecast for the year.
CVS Health delivered earnings that beat analyst expectations on Monday, boosted by the strength in its pharmacy services business, which offset weaker sales in its retail business.
Here's how CVS did in the third quarter compared with what Wall Street expected:
  • Adjusted EPS: $1.50 cents vs. of $1.48 expected, according to Thomson Reuters
  • Revenue: $46.2 billion vs. $46.17 billion expected, according to Thomson Reuters

The drugstore operator also announced it would start next-day delivery from its stores in 2018, a move some analysts are saying comes in response to Amazon's encroaching presence within the space.

"We will bring the pharmacy to our patients' doorsteps," Chief Executive Larry Merlo said on a call with analysts and investors.

Meantime, CVS is in talks to buy health insurer Aetna for a proposed $200 per share or more, sources familiar with the matter say. The potential deal comes as CVS moves further into health care amid increasing pressure on its traditional retail sales.

CVS reported net revenue of $46.18 billion, up 3.5 percent from the same quarter last year, and essentially in line with Thomson Reuters estimates.

In the third quarter, CVS said its net income fell to $1.29 billion, or $1.26 per share, from $1.54 billion, or $1.43 a share, a year earlier.

Excluding items, the company earned $1.50 per share, outpacing Wall Street estimates of $1.48 per share.

The Woonsocket, Rhode Island-based company has been transforming itself into a health-care business for years, propelled by its acquisition of the Caremark pharmacy benefit manager platform in 2007. (A PBM typically is a third party that negotiates prescription drug benefits for a commercial health plan.)

It generated net sales of $32.9 billion for its PBM business for the quarter — roughly 70 percent of its sales — up 8.1 percent from the quarter before. Profitability in the division though was hurt by pressure on drug prices.

An acquisition of an insurer like Aetna could give CVS greater bargaining power with drug companies.

Sales of cosmetics and household goods, CVS' "front of store" business, meanwhile dropped 2.8 percent. CVS increasingly faces competition for these goods from big-box stores and grocers, sometimes for a lower price.

Amazon's potential move into selling prescription drugs online adds further threat, because shoppers would be less likely to go to CVS to pick up their medications, and thus other household goods.

The Seattle giant also recently launched "Discount provided by Amazon" promotions, in which it slashes prices on third-party goods it is selling, in order to meet or beat the prices of its rivals like Wal-Mart.

CVS narrowed and raised the midpoint of the range for full-year adjusted earnings per share from $5.87 to $5.91. Including the charges due to hurricanes, from $5.83 to $5.93.