CVS Earnings: Management Gives Cautious Near-Term Outlook Due to Elevated Medical Utilization
Management largely maintained its near-term guidance; CVS stock remains undervalued.
Key Morningstar Metrics for CVS Health
- Fair Value Estimate: $103.00
- Morningstar Rating: 5 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Medium
What We Thought of CVS Health’s Earnings
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 11% revenue growth, but increased medical utilization and a tough retail store environment constrained adjusted earnings per share 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 COVID-19 pandemic eased. 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.
In the longer term, CVS’ new MA star ratings have improved substantially (suggesting last year’s ratings were a fluke), and this 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 target of double-digit earnings growth 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.