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CVS Health (CVS) Stock Pre-Q2 Earnings: To Buy or Not to Buy?
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CVS Health Corporation (CVS - Free Report) is scheduled to report second-quarter 2024 results on Aug 7, before the opening bell.
In the last reported quarter, the company’s adjusted earnings of $1.31 missed the Zacks Consensus Estimate by 22.49%. CVS Health beat estimates in three of the trailing four quarters and missed in one, the average negative surprise being 2.25%.
The Zacks Consensus Estimate for revenues is pegged at $91.56 billion, suggesting growth of 2.9% year over year. The consensus estimate for second-quarter earnings is pegged at $1.74 per share, implying a 21.3% decline on a year-over-year basis.
Estimate Trend
Earnings estimates for CVS Health have dropped from $1.82 per share to $1.74 for the second quarter over the past 60 days.
Image Source: Zacks Investment Research
Let’s look at how things have shaped up for CVS Health before the announcement.
Factors to Focus on Ahead of Q2 Earnings
Health Care Benefits
Within this segment, the company has been grappling with a sudden increase in Medicare Advantage members’ utilization trend, where an increasing number of members are opting for health benefits. This is materially impacting results. CVS Health is particularly facing outpatient and supplemental benefits pressure. Added to this, the company is also witnessing new pressures emerging from inpatient categories, RSV vaccines and other pharmacy benefits. This is leading to a significant rise in the company’s medical costs, resulting in huge margin burdens. The company originally expected this utilization pressure to gradually fade in 2024. However, later, CVS Health announced that Medicare Advantage utilization might continue through 2024. This might be reflected in the company’s second-quarter results prominently.
In this regard, we note that, in April, the company saw multiple days of high-paid claim activity, consistent with the restoration of Change Healthcare (following a cyber incident) and the associated backlog from that disruption. On the first-quarter earnings conference call in May, the company noted that the incident established a reserve of nearly $500 million in unexpected claims. These missing claims comprised of half of the company’s reserve of Medicare business. We expected these to put significant pressure on the company’s second-quarter performance.
This apart, the Medicaid business too is expected to have experienced medical cost pressure, largely driven by higher acuity from member redeterminations. This, too, might have dented the company’s results in the second quarter.
However, the company might have faced favorable medical cost trends in the commercial business. Inpatient bed days are expected to have been favorable. Mental health and pharmacy trends too are expected to have been satisfactory and consistent with the previously reported
Going by the Zacks Consensus Estimate, CVS’ Health Care Benefits arm revenues are likely to have improved 26.2% year over year in the second quarter of 2024.
Health Services
In the to-be-reported quarter, the segment is expected to have faced pressure from the loss of a large client and continued pharmacy client price increases. However, these downsides are expected to have been offset by pharmacy drug mix, growth in specialty pharmacy and accretive contributions from the acquisitions of Oak Street Health and Signify Health.
We expect CVS to continue to promote the greater adoption of biosimilars and increase the affordability of these critical specialty drugs for its clients and their members. Cordavis is likely to have played a crucial role in reducing drug costs and ensuring a consistent supply of affordable, high-quality biosimilars for patients. All these trends are likely to have favored the company’s top line in the second quarter of 2024.
The Zacks Consensus Estimate for the Health Services arm’s revenues indicates a 7.4% year-over-year decline in the second quarter of 2024.
Pharmacy & Consumer Wellness
In the to-be-reported quarter, the segment’s performance is expected to have been driven by strong operational execution. CVS may have continued to provide access to critical immunizations in the communities it serves and delivered on pharmacy performance measures for health plan partners. Both same-store sales and same-store prescription volumes are expected to have increased year over year in the second quarter of 2024, benefiting CVS’ top line.
We also expect the company to make notable progress with the new CVS CostVantage model, which promises greater transparency and simplicity and represents a significant shift from the traditional pharmacy reimbursement model. CVS had earlier reached a preliminary agreement with multiple cash discount card administrators, who are likely to have begun using CVS CostVantage since Apr 1.
Meanwhile, the company is likely to have progressed in its store closure initiative, with plans to close 900 stores by the end of this year. The decrease in store count, along with the impact of recent generic introductions and continued reimbursement pressure, may have dented the segment’s growth rate in the to-be-reported quarter, thus affecting CVS’ operational performance.
The Zacks Consensus Estimate for the Pharmacy & Consumer Wellness segment calls for a 3.8% year-over-year improvement in the second quarter of 2024.
What Our Model Suggests
Per our proven model, stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), along with a positive Earnings ESP, have a higher chance of beating estimates, which is not the case here:
Earnings ESP: CVS Health has an Earnings ESP of -4.95%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: The company currently carries a Zacks Rank #4 (Sell).
Shares Outperform Industry, Underperforms Sector and S&P
Year to date, shares of CVS Health have lost 22.8%. The stock has outperformed the Retail Pharmacies and Drug Store’s 29.2% decline. However, CVS shares underperformed the Zacks Retail sector’s increase of 9.5% and the S&P 500’s rise of 14.5%.
YTD Price Comparison
Image Source: Zacks Investment Research
Key Valuation Metric
From a valuation standpoint, CVS Health’s forward 12-month price-to-earnings (P/E) is 8.21X, a premium to the industry's average of 7.61X. The company is also trading at a significant premium to other industry players like Walgreens Boots (WBA - Free Report) , with its current P/E being 5.37, and Herbalife (HLF - Free Report) , whose current P/E is 7.1X. This suggests that investors may be paying a higher price relative to the company's expected earnings growth.
Image Source: Zacks Investment Research
Long-Term Investment Visibility
The near-term challenges discussed earlier are no doubt worrisome for CVS Health. Yet, the company remains resilient in its strategic direction, utilizing integrated healthcare models and technological advancements to improve service delivery and patient outcomes. The acquisition of Oak Street Health advances the company’s care delivery strategy for consumers, which is likely to boost future growth. Its financial stability is encouraging.
Meanwhile, the company’s 2025 roadmap looks impressive. CVS Health is now committed to improving its Medicare Advantage margins in 2025. Given its predicted baseline performance, 2025 will be the first stage in a three to four-year journey to re-establish the company's target margins of 4 to 5%. Improved Star Ratings in 2025 might generate a $700 million tailwind, depending on membership retention levels. The remainder of the company's margin gain in 2025 will be driven by pricing initiatives in an environment where it is experiencing headwinds from an insufficient rate notice and prescription medication coverage changes that significantly raise plan liability.
CVS Health is accelerating long-term enterprise productivity measures to streamline and enhance its processes. The company's target is to achieve low double-digit adjusted EPS growth in 2025.
End Note
CVS Health’s second-quarter 2024 results are likely to suffer primarily from unfavorable utilization trends within the Health Care Benefits business. This apart, the entire retail pharmacy industry is currently grappling with continued pressure from non-reimbursable pharmacy expenses, which are pulling down mass demand for prescription as well as over-the-counter drugs and vaccinations. The company, along with its peers like Walgreens Boots and Herbalife, are severely affected by this ongoing crisis. To tackle this issue, CVS Health has launched its store closure initiative, which is again denting the company’s revenues.
Meanwhile, no significant growth prospects until 2025 and a stretched valuation make the stock a risky bet. Accordingly, despite the recent dip in share prices, this might not be the ideal time to invest in CVS Health. In fact, those who already own this stock may consider selling it ahead of its earnings release, taking into account the company’s gloomy second-quarter 2024 outlook.
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CVS Health (CVS) Stock Pre-Q2 Earnings: To Buy or Not to Buy?
CVS Health Corporation (CVS - Free Report) is scheduled to report second-quarter 2024 results on Aug 7, before the opening bell.
In the last reported quarter, the company’s adjusted earnings of $1.31 missed the Zacks Consensus Estimate by 22.49%. CVS Health beat estimates in three of the trailing four quarters and missed in one, the average negative surprise being 2.25%.
The Zacks Consensus Estimate for revenues is pegged at $91.56 billion, suggesting growth of 2.9% year over year. The consensus estimate for second-quarter earnings is pegged at $1.74 per share, implying a 21.3% decline on a year-over-year basis.
Estimate Trend
Earnings estimates for CVS Health have dropped from $1.82 per share to $1.74 for the second quarter over the past 60 days.
Image Source: Zacks Investment Research
Let’s look at how things have shaped up for CVS Health before the announcement.
Factors to Focus on Ahead of Q2 Earnings
Health Care Benefits
Within this segment, the company has been grappling with a sudden increase in Medicare Advantage members’ utilization trend, where an increasing number of members are opting for health benefits. This is materially impacting results. CVS Health is particularly facing outpatient and supplemental benefits pressure. Added to this, the company is also witnessing new pressures emerging from inpatient categories, RSV vaccines and other pharmacy benefits. This is leading to a significant rise in the company’s medical costs, resulting in huge margin burdens. The company originally expected this utilization pressure to gradually fade in 2024. However, later, CVS Health announced that Medicare Advantage utilization might continue through 2024. This might be reflected in the company’s second-quarter results prominently.
In this regard, we note that, in April, the company saw multiple days of high-paid claim activity, consistent with the restoration of Change Healthcare (following a cyber incident) and the associated backlog from that disruption. On the first-quarter earnings conference call in May, the company noted that the incident established a reserve of nearly $500 million in unexpected claims. These missing claims comprised of half of the company’s reserve of Medicare business. We expected these to put significant pressure on the company’s second-quarter performance.
This apart, the Medicaid business too is expected to have experienced medical cost pressure, largely driven by higher acuity from member redeterminations. This, too, might have dented the company’s results in the second quarter.
However, the company might have faced favorable medical cost trends in the commercial business. Inpatient bed days are expected to have been favorable. Mental health and pharmacy trends too are expected to have been satisfactory and consistent with the previously reported
Going by the Zacks Consensus Estimate, CVS’ Health Care Benefits arm revenues are likely to have improved 26.2% year over year in the second quarter of 2024.
Health Services
In the to-be-reported quarter, the segment is expected to have faced pressure from the loss of a large client and continued pharmacy client price increases. However, these downsides are expected to have been offset by pharmacy drug mix, growth in specialty pharmacy and accretive contributions from the acquisitions of Oak Street Health and Signify Health.
We expect CVS to continue to promote the greater adoption of biosimilars and increase the affordability of these critical specialty drugs for its clients and their members. Cordavis is likely to have played a crucial role in reducing drug costs and ensuring a consistent supply of affordable, high-quality biosimilars for patients. All these trends are likely to have favored the company’s top line in the second quarter of 2024.
The Zacks Consensus Estimate for the Health Services arm’s revenues indicates a 7.4% year-over-year decline in the second quarter of 2024.
Pharmacy & Consumer Wellness
In the to-be-reported quarter, the segment’s performance is expected to have been driven by strong operational execution. CVS may have continued to provide access to critical immunizations in the communities it serves and delivered on pharmacy performance measures for health plan partners. Both same-store sales and same-store prescription volumes are expected to have increased year over year in the second quarter of 2024, benefiting CVS’ top line.
We also expect the company to make notable progress with the new CVS CostVantage model, which promises greater transparency and simplicity and represents a significant shift from the traditional pharmacy reimbursement model. CVS had earlier reached a preliminary agreement with multiple cash discount card administrators, who are likely to have begun using CVS CostVantage since Apr 1.
Meanwhile, the company is likely to have progressed in its store closure initiative, with plans to close 900 stores by the end of this year. The decrease in store count, along with the impact of recent generic introductions and continued reimbursement pressure, may have dented the segment’s growth rate in the to-be-reported quarter, thus affecting CVS’ operational performance.
The Zacks Consensus Estimate for the Pharmacy & Consumer Wellness segment calls for a 3.8% year-over-year improvement in the second quarter of 2024.
What Our Model Suggests
Per our proven model, stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), along with a positive Earnings ESP, have a higher chance of beating estimates, which is not the case here:
Earnings ESP: CVS Health has an Earnings ESP of -4.95%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: The company currently carries a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 Rank stocks here
Shares Outperform Industry, Underperforms Sector and S&P
Year to date, shares of CVS Health have lost 22.8%. The stock has outperformed the Retail Pharmacies and Drug Store’s 29.2% decline. However, CVS shares underperformed the Zacks Retail sector’s increase of 9.5% and the S&P 500’s rise of 14.5%.
YTD Price Comparison
Image Source: Zacks Investment Research
Key Valuation Metric
From a valuation standpoint, CVS Health’s forward 12-month price-to-earnings (P/E) is 8.21X, a premium to the industry's average of 7.61X. The company is also trading at a significant premium to other industry players like Walgreens Boots (WBA - Free Report) , with its current P/E being 5.37, and Herbalife (HLF - Free Report) , whose current P/E is 7.1X. This suggests that investors may be paying a higher price relative to the company's expected earnings growth.
Image Source: Zacks Investment Research
Long-Term Investment Visibility
The near-term challenges discussed earlier are no doubt worrisome for CVS Health. Yet, the company remains resilient in its strategic direction, utilizing integrated healthcare models and technological advancements to improve service delivery and patient outcomes. The acquisition of Oak Street Health advances the company’s care delivery strategy for consumers, which is likely to boost future growth. Its financial stability is encouraging.
Meanwhile, the company’s 2025 roadmap looks impressive. CVS Health is now committed to improving its Medicare Advantage margins in 2025. Given its predicted baseline performance, 2025 will be the first stage in a three to four-year journey to re-establish the company's target margins of 4 to 5%. Improved Star Ratings in 2025 might generate a $700 million tailwind, depending on membership retention levels. The remainder of the company's margin gain in 2025 will be driven by pricing initiatives in an environment where it is experiencing headwinds from an insufficient rate notice and prescription medication coverage changes that significantly raise plan liability.
CVS Health is accelerating long-term enterprise productivity measures to streamline and enhance its processes. The company's target is to achieve low double-digit adjusted EPS growth in 2025.
End Note
CVS Health’s second-quarter 2024 results are likely to suffer primarily from unfavorable utilization trends within the Health Care Benefits business. This apart, the entire retail pharmacy industry is currently grappling with continued pressure from non-reimbursable pharmacy expenses, which are pulling down mass demand for prescription as well as over-the-counter drugs and vaccinations. The company, along with its peers like Walgreens Boots and Herbalife, are severely affected by this ongoing crisis. To tackle this issue, CVS Health has launched its store closure initiative, which is again denting the company’s revenues.
Meanwhile, no significant growth prospects until 2025 and a stretched valuation make the stock a risky bet. Accordingly, despite the recent dip in share prices, this might not be the ideal time to invest in CVS Health. In fact, those who already own this stock may consider selling it ahead of its earnings release, taking into account the company’s gloomy second-quarter 2024 outlook.