CVS Health Corp (CVS) shares tumbled over 11% following the company’s revenue miss and disappointing outlook. The drugstore operator and pharmacy benefits manager recorded earnings of $1.64 a share, a 7 cent beat from the analysts’ estimates of $1.57. Revenue rose 15.5% to $44.6 billion compared to a year ago, and was a miss of the eyed $45.3 billion estimate. The company also cut its 2016 EPS guidance from $5.81-5.89 to $5.77-5.83. Revenue guidance was lowered from 17.0-17.5% to 16.0-16.5%.
CEO Larry Merlo noted, “We posted a solid third quarter with the PBM exceeding our expectations and retail performing at the lower end of our expectations. However, very recent pharmacy network changes in the marketplace are expected to cause some retail prescriptions to begin migrating out of our pharmacies this quarter. In addition, we are currently experiencing slowing prescription growth in the overall market as well as a soft seasonal business. These factors combined are leading us to reduce the mid-point of our guidance for this year by five cents per share. The network changes have more significant implications for our 2017 outlook. While we expect a healthy increase in PBM operating profit growth in 2017, we expect a decrease in retail operating profit growth.”
Price action on the CVS weekly chart shows the bearish trend is firmly but price may have formed a bullish Gartley pattern. Point D is targeted with the 50.0% Fibonacci retracement of the X to A leg and the 141.4% Fibonacci expansion level of the B to C leg. If valid, we could see price fill the majority of the gap that was created following Tuesday’s earning miss.
If we see the key $69.00 support level taken out, further downside may target the 2014 low of $64.95. If we see price stabilize here, key resistance will come from the $80.00 level.
The Trade: Buy CVS at $72.50, with a stop loss at $71.50 and a take profit at $75.50. The Risk/Reward Ratio is 1:3