3 ETFs to Buy on CVS Earnings

Investors were be looking to hear how CVS's (CVS) continued transition into a pharmacy benefits manager is going and what the longer term impact of exiting Tricare will be.

CVS, which reported this morning, saw shares drop 16% in pre-market trading after the company lowered its profit outlook for this year. The drug store giant recently exited Tricare -- the military health program for the Department of Defense -- a curious move to investors, which has impacted the company's pharmacy market share.

However, Leerink analyst David Larsen didn't believe the impact will be that large. "While there are ~127M+ scripts associated with Tricareeach year, we estimate that just ~30.6M of these prescriptions are 'retail' and as a result we do not believe that CVS' exclusion from the Tricare network will be material," Larsen wrote in a note to clients.

Despite Larsen's tempered negativity, he did note that many investors believe the move will have an "unfavorable EPS impact to CVS will be much higher than what we estimate." 

Credit Suisse analyst Robert Willoughby cut his 2017 earnings estimates to $6.55 a share, down from $6.60 a share, because of the loss of the contract. However, other aspects of the company's business, like "another solid PBM selling season in 2017, deal synergies from recent transactions including Target pharmacies," and the ability to add more stores are "tailwinds" for the company.

Analysts surveyed by Yahoo! Finance expect the company to earn cents a share on $45.3 billion in revenues.

In addition to the impact from the loss of Tricare, investors are  looking to hear how CVS's role as a pharmacy benefits manager (PBM) is going, as well as how taking over Target's (TGT) pharmacies is going. 

Despite the unhealthy earnings report, for those investors who believe in CVS, these three ETFs may a smart place to put their money.

iShares Edge MSCI Multifactor Consumer Staples ETF

CVS makes up 6.92% of the iShares Edge MSCI Multifactor Consumer Staples ETF (CNSF) , which has $2.5 million in assets under management and has a 0.35% expense ratio.

Credit Suisse's Willoughby, who has an outperform rating and a $110 price target, said investors will also be looking to hear whether CVS can add stores in "attractive geographies," due to Walgreen's proposed merger with Rite Aid. "These factors, coupled with ashareholder friendly capital deployment strategy, should contribute to low tomid double digit annual EPS growth," Willoughby wrote in a note to clients.

Consumer Staples Select Sector SPDR Fund

The Consumer Staples Select Sector SPDR Fund (XLP)  has CVS make up 5.23% of its $8.15 billion portfolio and charges investors a 0.15% expense ratio.

Leerink's Larsen, who rates CVS shares outperform with a $105 price target, believes that despite the loss of the Tricare contract, the company's organic growth is good. 

"Several investors we have spoken with have questioned CVS' organic growth profile in 2016," Larsen wrote in a note to clients. "We estimate that in 2014 Omnicare generated $6.4B in revenue and an~11.4% adjusted EBITDA margin. If we back-out Omnicare's earnings from CVS in 2015 and from our 2016E model, we estimate that CVS will post ~6% organic EBITDA growth from 2015 to 2016, which in our view is good."

PowerShares Dynamic Retail Portfolio ETF

The PowerShares Dynamic Retail Portfolio ETF (PMR)  has CVS make up 5.03% of its $22.3 million portfolio and charges investors a 0.63% expense ratio.

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