CVS Health Isn't Very Healthy

Shares of CVS Health (CVS) are not looking very healthy. In the last six months, the stock is down more than 21%. CVS reports third-quarter fiscal 2016 results Tuesday. Can this stock return to health?

Shares of CVS have been sliding downhill since the company reported its first quarter. The company chopped 5 cents out of the second quarter and left year-end 2016 guidance unchanged at $5.80. Then, after the second quarter report, management boosted the year-end forecast by 5 cents to $5.85.

Despite two decent earnings reports, the stock keeps sinking lower.

I think investors are concerned about three things: the general climate surrounding prescription drugs, the pharmacy benefits manager selling season and the increase in the number of generic drugs, which is slowing growth.

The pharmaceutical industry hasn't done itself any favors by raising prices on prescriptions drugs or by selling mega-expensive drugs, especially in an election year. It seems the news is filled with stories about the soaring price of EpiPens or drugs like Orkambi for cystic fibrosis, which is priced at $259,000, or Harvoni for hepatitis C, priced at $189,000. If Hillary Clinton is elected President, prescription drug prices could come under pressure. (With the pounding these stocks have taken, it seems like the stock market has anticipated a Clinton win.)

CVS has lost a few important rounds during the pharmacy benefits manager selling season. Last week, Tricare -- the U.S. Department of Defense military health program -- announced that as of Dec. 1, CVS would no longer be part of its pharmacy network. Walgreens (WBA) will take its place. CVS took the business from Walgreens in 2012. It is estimated the Department of Defense spends $13 billion a year on prescription drugs, so CVS could lose not just the profits from filling prescriptions, but the earnings from military personal buying candy and gum from the front of the store. It is estimated that Tricare represents over 125 million prescriptions a year. That's a lot of boots in the store!

Walgreens Boots Alliance is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells WBA? Learn more now.

Back in May, CVS lost the California Public Employees' Retirement System, or CalPERS, business, which represents 486,000 members who spend an estimated $4.9 billion a year on prescription drugs. CVS had the CalPERS business since 2012.

CVS management doesn't seem too worried about high-profile losses. On the August conference call, management noted it landed $7.4 billion of new business, which was about double what investors had anticipated. On the Tuesday call, investors will be listening for an update on the massive Tricare loss.

On Aug. 2, CVS reported second-quarter earnings of $1.32 per share, 2 cents ahead of the consensus estimate. Revenue rose 17.6% to $43.73 billion, vs. the $44.28 billion consensus. Pharmacy services increased 20.7% to $29.5 billion. The increase was driven by increased claim volume and growth in the specialty pharmacy segment. Pharmacy network claims processed increased 22.6% to 280.5 million.

Retail pharmacy revenue grew 16% to $20 billion. The increase was mostly from the acquisition of Omnicare and the pharmacies of Target (TGT) . Same-store sales increased 2.1%. Pharmacy same-store sales were hurt by 355 basis points from recent generic drug introductions. CVS makes less profit on generic drugs. And I think investors are worried about the number of branded drugs switching over to generic over the next few years.

CVS will report third-quarter earnings on Tuesday. This could be a critical inflection point in the stock. Analysts are looking for revenue of $45.3 billion, up 18%, and earnings of $1.57, up 22%.

Going into the third-quarter report, Wall Street is very positive on the stock. Analysts feel CVS should trade up to the midpoint of the pharmacy benefits manager multiple. Historically, the PBM group trades around 16 times forward estimates of $6.50, or $104.

But it appears investors don't agree. On Friday, the Rhode Island news was filled with stories about layoffs at CVS. According to multiple reports, the company is laying off as many as 600 people, of which about 250 are from Rhode Island. CVS is Rhode Island's largest employer.

I would avoid the stock. I don't think the slide in CVS shares is over. It feels like analyst estimates are too high. Why else would the company be cutting employees so close to the holidays? The Tricare loss also hurts. I would look for the company to cut guidance on the Tuesday call.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

If you liked this article you might like

Walmart Sinks Dow; Albertsons to Fight Off Grocery Struggles With Rite Aid-ICYMI

Walmart Sinks Dow; Albertsons to Fight Off Grocery Struggles With Rite Aid-ICYMI

Rite Aid Pops After Albertsons Plans to Buy Part of Drugstore Chain

Rite Aid Pops After Albertsons Plans to Buy Part of Drugstore Chain

Goldman Bankers (Mostly) Upbeat on Tech M&A and IPO Trends

Goldman Bankers (Mostly) Upbeat on Tech M&A and IPO Trends

Why a Walgreens Purchase of Humana or WellCare Now Appears Less Likely

Why a Walgreens Purchase of Humana or WellCare Now Appears Less Likely

5 Awesome Stock Picks That Will Survive a Choppy Market

5 Awesome Stock Picks That Will Survive a Choppy Market