CVS Earnings: Management Gives Cautious Near-Term Outlook Due to Elevated Medical Utilization
Narrow-moat CVS Health CVS 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.
CVS turned in solid results, including 11% revenue growth, but increased medical utilization and a tough retail store environment constrained adjusted EPS growth to just 2%. The medical insurer delivered 6% membership growth on stellar individual exchange growth, decent Medicare Advantage growth despite weak MA star ratings, and a low-single-digit decline in Medicaid as redetermination activities continued. With elevated medical utilization in the period, though, the insurance segment’s adjusted operating profit declined 6% year over year. The retail store segment’s adjusted operating profit remained flat, as it faced a tough comparable period as the pandemic eases. These weak trends constrained total results, despite decent pharmacy benefit manager and healthcare services results of 11% adjusted operating income growth.
Management largely maintained its near-term guidance. For 2023, CVS still expects adjusted EPS of $8.50-$8.70 and operating cash flow of $12.5 billion-$13.5 billion, in line with our expectations. The company also reiterated its 2024 adjusted EPS outlook for $8.50-$8.70, although it highlighted that the low end of that range was most likely due to near-term utilization and MA challenges. Longer term, CVS’ new MA star ratings have improved substantially, suggesting last year’s MA star ratings were a fluke, and could positively influence 2024 marketing and 2025 bonus payments. Therefore, CVS’ earnings growth prospects look likely to improve after 2024. But whether CVS can deliver on its double-digit earnings growth target on a durable basis remains an open question, given growing challenges in the PBM business and a tough retail environment.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.