Be Wary of CVS Shares, After It Plummets on a Dour 2017 Forecast

Shares of CVS Health (CVS) plunged on Tuesday in its biggest intraday loss in more than a year after the company released its earnings forecasts for 2017.

The company's chief executive said that the company would suffer from slowing prescription sales. 

Shares of CVS fell 11%. 

The 2017 projections soured what might have been an otherwise decent third-quarter earnings report.

For the quarter, CVS soundly beat a few of the analyst expectations.

Earnings clocked in at $1.64 a share, versus the consensus estimate of $1.57 a share. Net income attributable to CVS's pharmacies rose by 24% year over year, to $1.54 billion or $1.43 a share, from $1.25 billion, or $1.11 a share.

To be sure, revenue of $44.6 billion was below analysts' forecasts.

But that's not the biggest disappointment to come out of Tuesday's earnings announcement.

For fiscal 2017, CVS announced that it expects adjusted earnings to range from $5.77 to $5.93 per share. That is far from the $6.53 per share that the Wall Street consensus forecast. And the company further displeased investors by announcing a "multiyear" plan to buy back another $15 billion of its own stock.

Part of the company's expected woes next year is attributable to restrictive changes to pharmacy networks. "Very recent pharmacy network changes in the marketplace are expected to cause some retail prescriptions to begin migrating out of our pharmacies this quarter," said CVS CEO Larry Merlo on Tuesday. "In addition, we are currently experiencing slowing prescription growth in the overall market as well as a soft seasonal business."

CVS took a big hit to its business in August, when the Prime Therapeutics pharmacy benefit management company switched its 22 million members from CVS to Walgreens Boots Alliance.

And in September, that pain was compounded when Express Scripts Holding stated that Tricare, the health insurance program for members of the U.S. military that it administers, would be dropping CVS. That means CVS will lose a total of 40 million customers next year.

This is especially painful as competition in the market for retail pharmacies heats up. Walgreens agreed to purchase rival Rite Aid last year, making it an immense competitor. In turn, CVS spent $12.9 billion to purchase Omnicare, a pharmacy company centered around nursing care facilities, as well as $1.9 billion to buy the pharmacies located inside stores owned by Target.

These purchases helped CVS grow its revenue by 15% in the third quarter, but CVS is in danger of becoming bloated.

Investors should be wary of this stock. 40 million is a huge number of accounts to lose. Keep a watchful eye, and don't purchase on any dips or plunges, as occurred Tuesday.

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The author is an independent contributor who at the time of publication owned none of the stocks mentioned.

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