A number of analysts have downgraded estimates for CVS Health CVS following the pharmacy benefit and retail pharmacy stalwart’s disappointing third-quarter 2024 results last week. The company’s adjusted earnings per share (EPS) of $1.09 plunged 50.7% year over year in the third quarter, reflecting continued utilization pressure and the unfavorable impact of the company's Medicare Advantage star ratings for the 2024 payment year within the Medicare product line.

The company’s huge premium deficiency reserve, based on anticipation of reporting losses in the fourth quarter of 2024 within the Medicare and individual exchange product lines, further intensified the bearish market sentiment.

Earnings estimates for CVS Health have slipped 17.9% to $1.42 per share for the fourth quarter over the past seven days, with four downward revisions in contrast to a single upward movement. For 2024, estimates have declined 9.8% to $5.73 in a week following five downward revisions and just one upward movement.

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Following the stock’s significant selloff last week, shares of CVS declined 7% till yesterday’s close.

More on CVS' Q3 Results

The results in the Healthcare Benefits business remained challenged in the third quarter as a result of continued elevated levels of utilization. According to CVS Health, both macro and company-specific factors resulted in the challenges within the Aetna business. This elevated utilization pressure largely stemmed from the COVID-19 pandemic and higher acuity as a result of the Medicaid redeterminations.

CVS Health expects the elevated levels of utilization to continue to put pressure on its 2024 performance and as a result the company could not provide a formal outlook for 2024.

Further, as we mentioned earlier, the disappointing star ratings for 2024 are giving the company a temporary reimbursement challenge. The company, while bidding for its 2024 Medicare Advantage business, had underestimated the medical cost. In this rising trend environment, the company offered rich benefits, which exacerbated the utilization pressure and increased membership rapidly. The individual exchange business too experienced a large increase in membership, leading to pockets of higher utilization and several disappointing risk adjustment updates. These miscalculations during the 2023 bid processes significantly burdened Aetna’s results in the third quarter.

Health Services revenues too were down in the reported quarter due to the previously announced loss of a large client and continued pharmacy client price improvements. However, the decline was partially offset by the pharmacy drug mix, increased contributions from the company's healthcare delivery assets and growth in specialty pharmacy.

On a positive note, the Health’s Pharmacy & Consumer Wellness business reported strong growth in the third quarter. Despite continued pharmacy reimbursement pressure and lower front store volumes, this business benefited from increased prescription volume, including increased contributions from vaccines and improved drug purchasing.

The expansion of both margins was encouraging too. The company’s integrated model accelerates its ability to deliver lower cost of care, a simpler experience and better outcomes. In addition, the expansion of both the margins in the quarter was highly encouraging. The company’s innovation is accelerating more transparent pharmacy reimbursement models, increasing the use of biosimilars and improving patient outcomes through its connected healthcare delivery assets.

Management is currently looking to capitalize on opportunities, including earlier leadership changes in the Health Care Benefits segment.

(Read more: CVS Health Q3 Earnings & Revenues Beat)

Thanks to several business-specific and industry-wide factors, the market has not been impressed with the company this year. Year to date, CVS Health witnessed a 29.3% decline against the S&P 500’s climb of 2.1%. During the same period, the broader Retail industry increased 25.3%, while the Retail Drug Store subindustry declined 36.8%.

YTD Price Comparison

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The company's direct peers like Herbalife HLF and Walgreens Boots Alliance WBA registered further plunge with respective declines of 43.2% and 64% in their stock prices during this period.

What Do the Moving Averages Say?

CVS Health 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

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As the stock struggles to keep pace, it is now a big question for investors whether to get rid of CVS Health or grab a few more shares because the stock is hovering around its rock bottom. 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' perspective in favor of CVS Health.

Let us delve deeper.

CVS Long-Term Prospects Bright

The near-term challenges 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 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. 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. Per the latest data, Aetna members served by Signify have nearly doubled compared to 2023. 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%.

Further, in October, CMS released its 2025 star ratings with 88% of the Medicare Advantage members in four-star plans or higher, and more than two out of every three Aetna MA members in a plan rated 4.5 stars. According to CVS Health, this will work in favor of the company’s business.

Successful Cost Cut Initiative to Reduce Debt Burden: CVS Health is successfully progressing with its transition to the CVS cost-managed model and has reached agreements covering more than half of the company’s total commercial scripts. The ongoing discussions with its large PBM partners remain active and constructive as the company moves forward with the full commercial contract implementation in January 2025. Within the pharmacy and consumer wellness business, the company continues to optimize its store footprint. By the end of November, CVS plans to complete its previously announced three-year store optimization initiative targeting 900 stores and expects to close approximately 270 stores in 2025. This, in a way, will also help the company to generate funds for debt repayment.

Stretched Valuation

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From a valuation standpoint, CVS Health’s forward 12-month price-to-earnings (P/E) is 8.30X, a premium to the industry average of 7.83X. The company is also trading at a significant premium to other industry players like Walgreens Boots, with its current P/E being 6.19, and Herbalife, whose current P/E is 7.83X.

Our Take

As we have already discussed, the stock is currently positioned below its moving averages, which indicates the possibility of negative movement. Further, the current stretched valuation suggests that investors may be paying a higher price relative to the company's expected earnings growth.

Therefore, despite the recent dip in share prices, this might not be the ideal time to invest in CVS Health. In fact, those who already own this Zacks Rank #4 (Sell) stock may consider selling it, taking into account the company’s gloomy 2024 outlook.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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