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What is the Right Approach for CVS Health (CVS) Post Q2 Results?
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Yesterday, CVS Health (CVS - Free Report) reported dull second-quarter 2024 results. The company’s top line fell short of expectations. Though the bottom line beat estimates, it decreased year over year, reflecting a decline in the Health Care Benefits segment's operating results. The segment’s results reflected continued utilization pressure and the unfavorable impact of the company's Medicare Advantage star ratings for the 2024 payment year within the Medicare product line.
Following the earnings release, the stock fell 3.2% to $56.47 at yesterday’s close.
Q2 Results in a Nutshell
Health Services revenues were down 8.8% to $42.17 billion in the reported quarter. The downside was mainly due to the previously announced loss of a large client and continued pharmacy client price increases. This compelled the company to cut its adjusted EPS guidance for full-year 2024
On a positive note, the expansion of both margins was encouraging. The company’s innovation is accelerating more transparent pharmacy reimbursement models, increasing the use of biosimilars and improving patient outcomes through its connected healthcare delivery assets. CVS’ integrated model and strategy are helping it thrive in a challenging environment. Management is looking to capitalize on opportunities, including leadership changes in the Health Care Benefits segment.
Thanks to several business-specific and industry-wide factors, the market has not been impressed with the company this year. Year to date, this pharmacy retail and PBM powerhouse witnessed a substantial 28.5% decline against the S&P 500’s climb of 10%. During the same period, the broader Retail industry increased 4.4%, while the Retail Drug Store subindustry declined 32.8%.
YTD Price Comparison
Image Source: Zacks Investment Research
Not only this, the stock is currently trading below its 50-day and 200-day moving averages, indicating the possibility of a further bearish shift in the stock's price.
CVS Below 50 & 200-Day SMA
Image Source: Zacks Investment Research
As the stock struggles to keep pace, it is now a big question for investors whether to get rid of CVS Health or grab a few more shares because the stock is hovering around its rock bottom. While the stock has been grappling with the industry-wide phenomenon of pharmacy reimbursement pressure, a turnaround might be in the cards, given its strategic initiatives that can change investors' perspectives in favor of CVS Health. Let us delve deeper.
What Pulled CVS Down?
Medical Advantage Complexity: Within the Health Care Benefits 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 significantly impacted the company’s second-quarter performance. CVS Health is particularly facing outpatient and supplemental benefits pressure.
Added to this, the company is also witnessing pressure emerging from inpatient categories, RSV vaccines and other pharmacy benefits. This has resulted in a significant rise in the company’s medical costs, resulting in margin burdens. In the second quarter, the medical benefit ratio of 89.6% increased 340 basis points year over year, primarily reflecting higher Medicare Advantage utilization and the premium impact of lower Star ratings for the payment year 2024. This apart, factors like the impact of higher acuity in Medicaid and the change in estimate for individual exchange risk adjustment accrual for the 2023 plan year have hurt this business.
The company originally expected this utilization pressure to gradually ease in 2024. However, CVS Health now fears that this utilization pressure might accelerate through the remainder of the year.
Pharmacy Reimbursement Crisis: The entire retail pharmacy industry is currently grappling with continued pressure from non-reimbursable pharmacy expenses, which are significantly pulling down mass demand for prescription as well as over-the-counter drugs and vaccinations. Going by a National Association of Chain Drugs report, payors are substantially shrinking reimbursement, many times below the cost of buying and dispensing prescription drugs. This is putting substantial and unsustainable financial pressure on the companies to the extent that many of the industry players over the past year were seen shutting down their entire business, reducing the number of stores or going private.
CVS Health, like its industry peers, is severely affected by this ongoing crisis. In fact, despite the company reporting revenue expansion, the shrinking margins and earnings are pretty alarming.
Labor Shortage Plagues the System: Despite the end of the healthcare emergency, the lingering effects forced frontline pharmacy retail workers like doctors and medical staff to leave the field. According to the article "A Public Health Crisis: Staffing Shortages in Health Care," published in Favorite Healthcare Staffing, the WHO predicts a shortfall of 15 million healthcare workers worldwide in 2030. This is naturally creating huge operational hazards for companies like CVS Health, resulting in productivity loss. Going by a 2024 Boston Globe report, CVS has, in fact, acknowledged an “unprecedented” labor shortage among pharmacists and other staff, leading customers to complain about longer lines, unanswered phones and unclean stores.
Better 2025 Prospects
The near-term challenges discussed earlier are no doubt worrisome for CVS Health. However, the company remains focused on its strategic moves, utilizing integrated healthcare models and technological advancements to improve service delivery and patient outcomes. The company is seeing accelerating opportunities from the integration of acquisitions like Signify and Oak Street into CVS Health assets. As per the latest data, Signify currently serves nearly twice as many Aetna members and to date, the number of Aetna members at Oak Street clinics has more than tripled. CVS Health currently expects this number to further expand in the 2025 annual enrolment period with the introduction of co-branded Aetna and Oak Street plans.
In June 2024, CVS Health submitted the bids for the 2025 Medicare Advantage plan. The company is currently confident about these bids being accepted and the pricing for 2025 reflecting prudent assumptions for utilization trends. These are expected to drive 100 to 200 basis points of margin recovery in 2025. This, according to CVS Health, will position it back to achieve its multi-year target margins of 4% to 5%.
Stretched Valuation
Image Source: Zacks Investment Research
From a valuation standpoint, CVS Health’s forward 12-month price-to-earnings (P/E) is 7.57X, a premium to the industry average of 7.22X. 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 4.94, and Herbalife (HLF - Free Report) , whose current P/E is 5.25X.
Our Take
As we have already discussed, the stock is currently positioned below its moving averages, which indicates the possibility of negative movement. Further, the current stretched valuation suggests that investors may be paying a higher price relative to the company's expected earnings growth.
Therefore, 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 Zacks Rank #4 (Sell) stock may consider selling it, taking into account the company’s gloomy 2024 outlook.
Image: Shutterstock
What is the Right Approach for CVS Health (CVS) Post Q2 Results?
Yesterday, CVS Health (CVS - Free Report) reported dull second-quarter 2024 results. The company’s top line fell short of expectations. Though the bottom line beat estimates, it decreased year over year, reflecting a decline in the Health Care Benefits segment's operating results. The segment’s results reflected continued utilization pressure and the unfavorable impact of the company's Medicare Advantage star ratings for the 2024 payment year within the Medicare product line.
Following the earnings release, the stock fell 3.2% to $56.47 at yesterday’s close.
Q2 Results in a Nutshell
Health Services revenues were down 8.8% to $42.17 billion in the reported quarter. The downside was mainly due to the previously announced loss of a large client and continued pharmacy client price increases. This compelled the company to cut its adjusted EPS guidance for full-year 2024
On a positive note, the expansion of both margins was encouraging. The company’s innovation is accelerating more transparent pharmacy reimbursement models, increasing the use of biosimilars and improving patient outcomes through its connected healthcare delivery assets. CVS’ integrated model and strategy are helping it thrive in a challenging environment. Management is looking to capitalize on opportunities, including leadership changes in the Health Care Benefits segment.
(Read more: CVS Health Beats Q2 Earnings, Cuts '24 EPS Outlook)
Thanks to several business-specific and industry-wide factors, the market has not been impressed with the company this year. Year to date, this pharmacy retail and PBM powerhouse witnessed a substantial 28.5% decline against the S&P 500’s climb of 10%. During the same period, the broader Retail industry increased 4.4%, while the Retail Drug Store subindustry declined 32.8%.
YTD Price Comparison
Image Source: Zacks Investment Research
Not only this, the stock is currently trading below its 50-day and 200-day moving averages, indicating the possibility of a further bearish shift in the stock's price.
CVS Below 50 & 200-Day SMA
Image Source: Zacks Investment Research
As the stock struggles to keep pace, it is now a big question for investors whether to get rid of CVS Health or grab a few more shares because the stock is hovering around its rock bottom. While the stock has been grappling with the industry-wide phenomenon of pharmacy reimbursement pressure, a turnaround might be in the cards, given its strategic initiatives that can change investors' perspectives in favor of CVS Health. Let us delve deeper.
What Pulled CVS Down?
Medical Advantage Complexity: Within the Health Care Benefits 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 significantly impacted the company’s second-quarter performance. CVS Health is particularly facing outpatient and supplemental benefits pressure.
Added to this, the company is also witnessing pressure emerging from inpatient categories, RSV vaccines and other pharmacy benefits. This has resulted in a significant rise in the company’s medical costs, resulting in margin burdens. In the second quarter, the medical benefit ratio of 89.6% increased 340 basis points year over year, primarily reflecting higher Medicare Advantage utilization and the premium impact of lower Star ratings for the payment year 2024. This apart, factors like the impact of higher acuity in Medicaid and the change in estimate for individual exchange risk adjustment accrual for the 2023 plan year have hurt this business.
The company originally expected this utilization pressure to gradually ease in 2024. However, CVS Health now fears that this utilization pressure might accelerate through the remainder of the year.
Pharmacy Reimbursement Crisis: The entire retail pharmacy industry is currently grappling with continued pressure from non-reimbursable pharmacy expenses, which are significantly pulling down mass demand for prescription as well as over-the-counter drugs and vaccinations. Going by a National Association of Chain Drugs report, payors are substantially shrinking reimbursement, many times below the cost of buying and dispensing prescription drugs. This is putting substantial and unsustainable financial pressure on the companies to the extent that many of the industry players over the past year were seen shutting down their entire business, reducing the number of stores or going private.
CVS Health, like its industry peers, is severely affected by this ongoing crisis. In fact, despite the company reporting revenue expansion, the shrinking margins and earnings are pretty alarming.
Labor Shortage Plagues the System: Despite the end of the healthcare emergency, the lingering effects forced frontline pharmacy retail workers like doctors and medical staff to leave the field. According to the article "A Public Health Crisis: Staffing Shortages in Health Care," published in Favorite Healthcare Staffing, the WHO predicts a shortfall of 15 million healthcare workers worldwide in 2030. This is naturally creating huge operational hazards for companies like CVS Health, resulting in productivity loss. Going by a 2024 Boston Globe report, CVS has, in fact, acknowledged an “unprecedented” labor shortage among pharmacists and other staff, leading customers to complain about longer lines, unanswered phones and unclean stores.
Better 2025 Prospects
The near-term challenges discussed earlier are no doubt worrisome for CVS Health. However, the company remains focused on its strategic moves, utilizing integrated healthcare models and technological advancements to improve service delivery and patient outcomes. The company is seeing accelerating opportunities from the integration of acquisitions like Signify and Oak Street into CVS Health assets. As per the latest data, Signify currently serves nearly twice as many Aetna members and to date, the number of Aetna members at Oak Street clinics has more than tripled. CVS Health currently expects this number to further expand in the 2025 annual enrolment period with the introduction of co-branded Aetna and Oak Street plans.
In June 2024, CVS Health submitted the bids for the 2025 Medicare Advantage plan. The company is currently confident about these bids being accepted and the pricing for 2025 reflecting prudent assumptions for utilization trends. These are expected to drive 100 to 200 basis points of margin recovery in 2025. This, according to CVS Health, will position it back to achieve its multi-year target margins of 4% to 5%.
Stretched Valuation
Image Source: Zacks Investment Research
From a valuation standpoint, CVS Health’s forward 12-month price-to-earnings (P/E) is 7.57X, a premium to the industry average of 7.22X. 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 4.94, and Herbalife (HLF - Free Report) , whose current P/E is 5.25X.
Our Take
As we have already discussed, the stock is currently positioned below its moving averages, which indicates the possibility of negative movement. Further, the current stretched valuation suggests that investors may be paying a higher price relative to the company's expected earnings growth.
Therefore, 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 Zacks Rank #4 (Sell) stock may consider selling it, taking into account the company’s gloomy 2024 outlook.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.