Company Reports

Managed-care organizations face significant regulatory risks that often crop up during election cycles and keep all our MCO moat ratings at narrow. Fortunately for MCO investors, the near-term regulatory risks of this election cycle look manageable, in our opinion, despite current pockets of weakness in Medicare Advantage, Medicaid, and pharmacy benefit management. Some of these near-term regulatory risks are even creating opportunities for long-term MCO investors. For example, our Best Idea in the industry is Humana, which continues to face uncertainty around its intermediate-term profit trajectory in the highly regulated Medicare Advantage market. Medicaid and individual plan leader Centene also looks undervalued while CVS' problems in Medicare Advantage and PBM transparency concerns keep its shares deeply discounted. Cigna, Elevance, and UnitedHealth shares look fairly valued to us.

Narrow-moat CVS Health delivered weak second-quarter results, primarily on deflated profits in Medicare Advantage, where spiking medical utilization and mispriced plans caused profits to decline substantially. Because this weakness may continue, management cut its 2024 guidance for the second time this year. However, changing our near-term estimates a bit does not materially affect our $93 fair value estimate, and shares remain cheap relative to the firm's longer-term prospects, in our opinion.

CVS aims to be the most customer-centric health company in the United States and has spent over a decade positioning itself as a managed care leader, with the acquisitions of pharmacy benefit manager Caremark (2007), insurance provider Aetna (2018), and healthcare service provider Oak Street (2023) defining its strategic direction. CVS' top-tier retail pharmacy, health insurer, and PBM franchises create the potential to improve health outcomes and even bend the healthcare cost curve for its clients, especially if it can align incentives by owning healthcare service providers, as well.

Narrow-moat CVS Health delivered weak first-quarter results due to deflated profits in Medicare Advantage, or MA, where spiking medical utilization and mispriced plans caused insurance segment profits to decline while the pharmacy benefit management business dealt with the Centene contract loss. Management cut its 2024 guidance primarily on the weak MA trends, and we are reducing our intermediate-term expectations for CVS, as well, which pushed down our fair value estimate to $93 per share from $103. Shares remain undervalued.

CVS aims to be the most customer-centric health company in the United States and has spent over a decade positioning itself as a managed care leader, with the acquisitions of pharmacy benefit manager Caremark (2007), insurance provider Aetna (2018), and healthcare service provider Oak Street (2023) defining its strategic direction. CVS' top-tier retail pharmacy, health insurer, and PBM franchises create the potential to improve health outcomes and even bend the healthcare cost curve for its clients, especially if it can align incentives by owning healthcare service providers, as well.

In an unusual development, the Centers for Medicare & Medicaid Services released its final Medicare Advantage, or MA, rate notice that matched its initial rate notice, instead of rising. In this final rate notice, the overall increase in MA revenue to insurers remained lower than the risk score trend, which is likely to pressure MA benefits, pricing, and/or insurer profits in 2025. We are reducing our fair value estimate on Humana by 5% on this disappointing development, given its focus on MA and our expectation that its previous profit goal in 2025 and potential growth in subsequent years may be constrained. However, we are not changing our fair value estimates on the other more diverse managed care organizations, or MCOs, that we cover, and market price declines on this news may create more attractive investment opportunities for investors with a long-term investment horizon. Currently, Humana, CVS, and Centene remain the most attractive MCOs on a price/fair value basis.

Narrow-moat CVS Health delivered strong fourth-quarter results, but due to spiking medical utilization in its growing Medicare Advantage, or MA, business, the firm trimmed its 2024 outlook that was just given at its December investor day. This mild guidance adjustment does not change our $103 fair value estimate, and we continue to view CVS shares as significantly undervalued. Shares appear to be rising in the belief that pricing on its CVS's outsize MA membership growth in 2024 will not have a more significant effect on its near-term outlook. That appears in contrast to the much steeper projected consequences at MA-focused Humana in 2024, and that difference is probably related to CVS' more diversified business mix.

Narrow-moat CVS Health reset its long-term profit growth goals at its investor day, which look more in line with our long-term expectations, and we are keeping our $103 fair value estimate intact, or well above where shares are trading. Instead of shooting for double-digit earnings growth, an industry standard in managed care, CVS now expects a more realistic floor of at least 6% growth in the long run. Additionally, CVS revealed new business models in its retail pharmacy and pharmacy benefit management businesses that could add more transparency to those highly scrutinized businesses.

CVS aims to be the most customer-centric health company in the United States and has spent over a decade positioning itself as a managed care leader, with the acquisitions of pharmacy benefit manager Caremark (2007), insurance provider Aetna (2018), and healthcare service provider Oak Street (2023) defining its strategic direction. CVS' top-tier retail pharmacy, health insurer, and PBM franchises create the potential to improve health outcomes and even bend the healthcare cost curve for its clients, especially if it can align incentives by owning healthcare service providers, as well.

Narrow-moat CVS Health delivered solid third-quarter results and maintained its 2023-24 outlook. Our estimates appear near management's near-term guidance ranges, and at first glance, our $103 fair value estimate remains intact and well above recent share prices.

In advance of the Medicare open enrollment period that starts on Oct. 15, the Centers for Medicare & Medicaid Services, or CMS, released its star ratings that measure the performance of the Medicare Advantage, or MA, plans offered by private insurers. At first glance, we do not anticipate changing our fair value estimates for any managed-care organization, or MCO, based on this new data. However, even as overall MA star ratings largely stabilized after a big drop last year, there were some clear winners and losers in this year's scoring that could affect market sentiment for MCO shares.

Near-term uncertainty is creating an opportunity for long-term investors in the managed-care organization segment. Of the six narrow-moat MCO stocks that we cover—Centene, Cigna, CVS Health, Elevance, Humana, and UnitedHealth—five are trading in undervalued territory, and even the typically premium-priced UnitedHealth looks reasonably valued to us.

Blue Shield of California announced that it was dropping CVS Health for its nonspecialty pharmacy benefit management services in favor of a coalition of providers, including Amazon and the Mark Cuban Cost Plus Drug Company. While these organizations have been making noise as potential PBM entrants for a while, this contract win looks like the first one with any real teeth, in our opinion, and could signal the start of a change in the PBM competitive landscape, particularly for top-tier players CVS, Cigna, and UnitedHealth. We do not expect to change our narrow moat ratings on these MCOs because of this announcement, though.

CVS aims to be the most customer-centric health company in the United States and has spent over a decade positioning itself as a managed care leader, with the acquisitions of pharmacy benefit manager Caremark (2007), insurance provider Aetna (2018), and healthcare service provider Oak Street (2023) defining its strategic direction. CVS' top-tier retail pharmacy, health insurer, and PBM franchises create the potential to improve health outcomes and even bend the healthcare cost curve for its clients, especially if it can align incentives by owning healthcare service providers, as well.

Narrow-moat CVS Health delivered solid second-quarter results and maintained its 2023 outlook but reduced its 2024 and 2025 goals. Slight changes to our intermediate-term assumptions, which were already below management's previous targets, do not materially change our $113 fair value estimate, though. CVS shares remain significantly undervalued, in our view.

Narrow-moat CVS Health delivered slightly-better-than-anticipated first-quarter results, but as we highlighted as likely in a late March note, the firm pushed down its guidance for 2023 earnings after closing the loss-generating Oak Street acquisition earlier than expected. Considering the better-than-expected first-quarter results, though, the firm's new 2023 outlook is slightly higher than what we started modeling in late March after the initial Oak Street announcement, and our $113 fair value estimate remains intact. Shares appear significantly undervalued to us.

Narrow-moat CVS Health announced that the Oak Street acquisition is expected to close earlier than anticipated in first-half 2023 rather than around the end of the year. This change will push Oak Street’s operating losses into CVS’ results earlier than anticipated, which will likely cut into 2023 EPS estimates. Even after considering that and other near-term headwinds in our assumptions, though, we are keeping our $113 fair value estimate for CVS intact and continue to view shares as significantly undervalued.

CVS aims to be the most customer-centric health company in the United States and has spent over a decade positioning itself as a leader in healthcare services, with the acquisitions of pharmacy benefit manager Caremark (2007), insurance provider Aetna (2018), and provider Oak Street (pending in 2023) defining its strategic direction. CVS' top-tier retail pharmacy, health insurer, and PBM franchises create the potential to improve health outcomes and even bend the healthcare cost curve for its clients, especially if it can align incentives by owning healthcare service providers, as well.

Narrow-moat CVS Health turned in a solid end to 2022, but the big news was that it finally pulled the trigger on a large primary care acquisition by agreeing to pay $10.6 billion ($39 per share) for Oak Street Health. We are still digging into the transaction, but at first glance, we do not anticipate changing our fair value estimate materially. Negatively, CVS management is asking investors to wait again for double-digit earnings growth because of this transaction and growing headwinds in the Medicare Advantage market. Overall, though, CVS shares remain moderately undervalued, in our view.

Narrow-moat CVS Health turned in strong third-quarter results, and management increased its 2022 adjusted EPS and operating cash flow outlook. At first glance, the firm's performance is tracking roughly in line with our EPS estimates and slightly above our cash flow estimates. However, even after tinkering with our near-term assumptions, our $113 fair value estimate has not changed materially, and shares remain moderately undervalued.