CVS Earnings: Weak Medicare Advantage Profits Cut Into 2024 Outlook
We are reducing our intermediate-term expectations for CVS, which pushed down our fair value estimate of its stock.
Key Morningstar Metrics for CVS Health
- Fair Value Estimate: $93.00
- 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 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. Meanwhile, the pharmacy benefit management business dealt with the loss of the Centene contract. Management cut its 2024 guidance primarily on the weak MA trends, and we are reducing our intermediate-term expectations for CVS, pushing our fair value estimate down to $93 per share from $103. Shares remain undervalued.
CVS is suffering as the MA enrollment winner in 2024, while medical utilization is surging in that population and insurers did not appropriately account for that medical cost increase in their June 2023 bids. CVS’ medical membership grew 4% year over year primarily on 22% growth in its MA membership and mild commercial membership growth. Unfortunately, that strong MA membership growth appears to have come with consequences for the firm’s profitability, as its medical cost ratio rose to 90% in the quarter, well above its previous 88% full-year goal at the midpoint and even above MA-focused Humana’s MCR of 89%, despite CVS’ more diverse membership base. MA profits are also suffering this year due to weak bonus payments because of a short-term weakness in CVS’ star ratings for this bonus year, which should rise going forward after its star ratings rebounded in the latest scoring cycle.
Looking forward, CVS cut its 2024 outlook on this MA profit weakness. Instead of at least $8.30 of adjusted earnings per share, CVS now expects at least $7.00, which is disappointing. On the call, management stated it still aims for low-double-digit adjusted EPS growth in 2025 as it rebounds from this weak result and higher MA star ratings boost 2025 MA bonus payments. That goal remains above the long-term outlook set at its recent analyst day of 6% intermediate-term adjusted EPS growth that accelerates to 7.5% by 2028.
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