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CVS Stock Tanks 27.5% Year to Date: Time to Buy the Dip?
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CVS Health (CVS - Free Report) stock closed at $57.24 on Monday, quite near to its 52-week low of $52.77. The stock has plunged 27.5% year to date, demonstrating the underlying challenges of the retail pharmacy industry. Investors’ sentiment continues to be bearish in spite of the company delivering second-quarter 2024 earnings surprise and recording margin expansion last month.
However, this PBM and pharmacy retail powerhouse has outperformed the broader Retail Pharmacy and Drug Store industry, which plunged 35.1% during this period. Major competitors of CVS Health — Herbalife Ltd (HLF - Free Report) and Walgreens Boots (WBA - Free Report) — registered a sharper decline of 46.6% and 64.6%, respectively, during this period.
YTD Share Performance
Image Source: Zacks Investment Research
The above scenario compels investors to think about whether to get rid of CVS Health or grab a few more shares now because the stock is hovering around its lows. 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.
Two Major Factors Pulling CVS Health Down
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 businesses, 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.
Medicare 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 from inpatient categories, RSV vaccines and other pharmacy benefits. This has resulted in a significant rise in the company’s medical costs, putting pressure on margins. 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 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 increase through the remainder of the year.
Meanwhile, 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
CVS Long-Term Prospects Bright
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.
Rapid Digital Growth: CVS is strategically investing in emerging technology capabilities such as voice, artificial intelligence and robotics to automate, reduce cost, and improve the experience for its constituents. The company has been removing barriers to digital adoption and making it easier for customers to access the services they seek, such as pharmacy refills and advanced scheduling for immunizations online. The company’s solid digital engagement and enhanced capabilities will strengthen its ability to drive seasonal flu and RFD immunization awareness and connect patients to the CVS locations for these important health services.
The company focuses on innovating and delivering experiences that matter most to customers, which is driving digital growth. In the second quarter of 2024, nearly 60 million unique customers utilized the CVS Health platform to schedule health services appointments, fill prescriptions and purchase wellness products, contributing to business growth. CVS Health sees tremendous opportunities to expand customer engagement across the organization through its multi-payer capabilities and vast consumer reach.
Bright 2025 Roadmap: 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 till the end of Q2, the number of Aetna members at Oak Street clinics 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 reflects prudent assumptions for utilization trends. This is 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%.
CVS Shares Are Expensive
In terms of valuation too, CVS Health’s forward 12-month price-to-earnings (P/E) is 8.09X, a premium to the market's average of 7.33X. The company is also trading at a significant premium to other industry players like Walgreens Boots (3.24X) and Herbalife (5.48X). This suggests that investors may be paying a higher price relative to the company's expected earnings growth. It also has a Value Score of A.
Image Source: Zacks Investment Research
Waiting for a Better Entry Point Seems Prudent
As we have already discussed, CVS stock is currently positioned below its moving averages, which indicates potential negative movement. Further, the stock’s stretched valuation suggests that investors may be paying a higher price relative to the company's expected earnings growth. Accordingly, despite the recent dip in share prices, this might not be the ideal time to invest in CVS Health. However, those who already own this Zacks Rank #3 (Hold) stock may stay invested as the company's financial stability and 2025 roadmap offer potential pathways to recovery.
Image: Bigstock
CVS Stock Tanks 27.5% Year to Date: Time to Buy the Dip?
CVS Health (CVS - Free Report) stock closed at $57.24 on Monday, quite near to its 52-week low of $52.77. The stock has plunged 27.5% year to date, demonstrating the underlying challenges of the retail pharmacy industry. Investors’ sentiment continues to be bearish in spite of the company delivering second-quarter 2024 earnings surprise and recording margin expansion last month.
However, this PBM and pharmacy retail powerhouse has outperformed the broader Retail Pharmacy and Drug Store industry, which plunged 35.1% during this period. Major competitors of CVS Health — Herbalife Ltd (HLF - Free Report) and Walgreens Boots (WBA - Free Report) — registered a sharper decline of 46.6% and 64.6%, respectively, during this period.
YTD Share Performance
Image Source: Zacks Investment Research
The above scenario compels investors to think about whether to get rid of CVS Health or grab a few more shares now because the stock is hovering around its lows. 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.
Two Major Factors Pulling CVS Health Down
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 businesses, 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.
Medicare 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 from inpatient categories, RSV vaccines and other pharmacy benefits. This has resulted in a significant rise in the company’s medical costs, putting pressure on margins. 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 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 increase through the remainder of the year.
Meanwhile, 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
CVS Long-Term Prospects Bright
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.
Rapid Digital Growth: CVS is strategically investing in emerging technology capabilities such as voice, artificial intelligence and robotics to automate, reduce cost, and improve the experience for its constituents. The company has been removing barriers to digital adoption and making it easier for customers to access the services they seek, such as pharmacy refills and advanced scheduling for immunizations online. The company’s solid digital engagement and enhanced capabilities will strengthen its ability to drive seasonal flu and RFD immunization awareness and connect patients to the CVS locations for these important health services.
The company focuses on innovating and delivering experiences that matter most to customers, which is driving digital growth. In the second quarter of 2024, nearly 60 million unique customers utilized the CVS Health platform to schedule health services appointments, fill prescriptions and purchase wellness products, contributing to business growth. CVS Health sees tremendous opportunities to expand customer engagement across the organization through its multi-payer capabilities and vast consumer reach.
Bright 2025 Roadmap: 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 till the end of Q2, the number of Aetna members at Oak Street clinics 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 reflects prudent assumptions for utilization trends. This is 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%.
CVS Shares Are Expensive
In terms of valuation too, CVS Health’s forward 12-month price-to-earnings (P/E) is 8.09X, a premium to the market's average of 7.33X. The company is also trading at a significant premium to other industry players like Walgreens Boots (3.24X) and Herbalife (5.48X). This suggests that investors may be paying a higher price relative to the company's expected earnings growth. It also has a Value Score of A.
Image Source: Zacks Investment Research
Waiting for a Better Entry Point Seems Prudent
As we have already discussed, CVS stock is currently positioned below its moving averages, which indicates potential negative movement. Further, the stock’s stretched valuation suggests that investors may be paying a higher price relative to the company's expected earnings growth. Accordingly, despite the recent dip in share prices, this might not be the ideal time to invest in CVS Health. However, those who already own this Zacks Rank #3 (Hold) stock may stay invested as the company's financial stability and 2025 roadmap offer potential pathways to recovery.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.