Deutsche Bank Does Some DIY Math On CVS And The PBM Question

Deutsche Bank previewed the fourth-quarter results of CVS Health Corp (NYSE: CVS), while also doing some DIY math on DIR fees. The company is scheduled to release its results Thursday before the markets open.

Q4 Expectations

Analyst George Hill expects the company to report earnings per share of $1.67, in line with the Street estimate and at the mid-point of the company's guidance of $1.64–$1.70. The analyst expects 2017 earnings per share of $5.85, which he noted is near the midpoint of the company's guidance and slightly below the Street estimate of $5.86 per share.

The firm believes investor expectations for the company are relatively low, given the disappointing guidance given in the third quarter and the perception that its retail business is likely a prescription market share loser for the next several years.

DIY Math On DIR Fees

Following reports by the CMS and a lobbying group on PBM Medicare Part D DIR fees the last several weeks, the firm noted that investors feared that CVS Health could have inappropriately profiting from these. The firm estimates the company's gross DIR fees from retailers annually to be $2 billion to $2.5 billion, with the vast majority of these fees paid upstream to plan sponsors or beneficiaries in the form of premium reductions. Accordingly, the firm believes retained DIR fees of CVS represent less than 2 percent of its earnings.

Investor Focus

Deutsche Bank thinks investors might be keyed into additional details on retail script trends, the benefit to the PBM segment from DIR fees and thoughts on the 2017 PBM selling season. The firm does not expect the investor anxiety over whether the company's integrated PBM/retailer business model is now working against it to quell any time soon.

Rating And Price Target

Deutsche Bank maintains its Hold rating on the shares of CVS Health and it has a $88 price target, which represents a multiple of 15 times its 2017 earnings per share estimate. The firm clarified that the multiple reflects customer risk in the PBM segment.

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