CVS Health’s CVS stock has gained strong momentum so far in 2025, rising 47.1%. While operating income declined nearly 5% in the fourth quarter of 2024 (as reported last month), impacted by continued pharmacy client price improvement, the loss of a large client and higher healthcare costs in the healthcare delivery assets that are tied to Medicare, investors remain optimistic about the company’s long-term strategy.

CVS’ focus on expanding healthcare services, its cost-cutting measures and the introduction of smaller pharmacy-centric stores have fueled confidence. Additionally, strong revenue growth in its pharmacy businesses have outweighed short-term concerns. As CVS navigates industry challenges, investors are betting on its efforts to drive future gains, keeping the stock on an upward trajectory.

Year to date, the stock has outperformed the S&P 500 and its direct competitors, Herbalife Ltd HLF and Walgreens Boots WBA. While HLF and WBA gained 33.2% and 20.9%, respectively, during this period, the S&P 500 declined 1.9%.

YTD Price Comparison

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Two Major Factors Contributing to CVS Stock's Rally

Rapid Digital Growth:  CVS Health is consistently increasing investments in fast-growing spaces like enterprise data platforms, cloud capabilities and digital products. The company is investing in emerging technology capabilities such as voice, artificial intelligence, and robotics to automate, reduce cost and improve the experience for its customers. 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 the CVS locations for these important health services. More customers are using the CVS Health platform to schedule health service appointments, fill prescriptions and purchase wellness products, which are contributing to its business growth. CVS Health sees tremendous opportunities to expand customer engagement across the organization through its multi-payer capabilities and vast consumer reach.

Restructuring Plan Progresses: CVS Health’s enterprise-wide restructuring plan was formed in 2023 to streamline and simplify the organization, improve efficiency and reduce costs. Additionally, the company identified a multi-year goal to realize $2 billion in savings over time by further streamlining and optimizing its operations and processes, rationalizing its business portfolio and accelerating the use of AI and automation. The savings will be reinvested strategically to support long-term business growth and meet customer needs.  Backed by its past success in effectively navigating industry challenges, the CVS Health team is implementing these actions with speed and urgency, utilizing broad resources and experience.

2025 Roadmap Looks Impressive

CVS Health is optimistic regarding its path forward in 2025 and beyond, which involves strengthening its positioning in Medicare Advantage. Management is confident about 2025 pricing, which is based on prudent assumptions for utilization trends. It expects these actions to drive 100 to 200 basis points of margin recovery in 2025 compared to its current baseline performance. This will be the first stage in a three to four-year journey to re-establish the company's target margins of 4 to 5%.

Improved Star Ratings in 2025 might generate a $700 million tailwind, depending on membership retention levels. The rest of the gains in the company’s 2025 margin will be driven by pricing initiatives in an environment where it is experiencing headwinds from an insufficient rate notice and prescription medication coverage changes that significantly raise plan liability. CVS Health will implement material price and benefit design adjustments in 2025, with the impact determined by how cost trends evolve in both 2024 and 2025, as well as how the market responds to those trends.

Furthermore, Signify Health continues to show impressive growth and is building momentum into 2025. CVS Health is progressing on its innovative pharmacy models and biosimilar strategy and is also advancing the integration of healthcare delivery assets. Overall, the company is taking steps to achieve profitable growth in 2025, focusing on a disciplined financial policy to strengthen its balance sheet.

Q1 Estimates Move Upward for CVS

Earnings estimates for CVS Health have increased 14.1% to $1.62 per share for the first quarter of 2025 over the past 30 days, with seven upward revisions in contrast to no downward movement.

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The stock is currently trading ahead of its 50-day and 200-day moving averages, indicating the possibility of a further bullish shift in its price.

CVS Above 50 & 200-Day SMA

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High Medicare Advantage Utilization Hurts Profitability

Within the company’s Health Care Benefits segment, the Aetna business is currently facing challenges from both broader macroeconomic and company-specific factors. Throughout 2024, the Medicare Advantage industry continued to experience elevated utilization of medical services and higher acuity as a result of the Medicaid redeterminations.

Aetna’s disappointing star ratings for 2024 created a temporary reimbursement challenge, with CVS Health underestimating the medical costs when setting its Medicare Advantage pricing. The combination of a rising trend environment and CVS Health’s rich benefits offering further exacerbated the utilization pressure while generating rapid membership growth.

Meanwhile, CVS Health has expressed concern that in the proposed 2026 Medicare Advantage advanced rate notice (released in January 2025), the Centers for Medicare & Medicaid Services did not address the unprecedented utilization trend experienced across the industry over the past two years. The company is advocating for a more appropriate rate update, including adjustments for the industry-wide cost trends seen in 2024.

CVS Shares are Expensive Too

In terms of valuation too, CVS Health’s forward 12-month price-to-earnings (P/E) is 10.77X, a premium to the company’s competitor WBA’s average of 7.38X. The company is also trading at a significant premium to Herbalife (4.84X). This suggests that investors may be paying a higher price relative to the company's expected earnings growth.

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Our Take

CVS Health started 2025 on a bright note, backed by strong investor confidence and continued momentum in its Pharmacy and Consumer Wellness segment. The company’s strategic initiatives, including footprint optimization and core business expansion, further reinforce its long-term growth trajectory.

However, the increasing utilization trend is weighing on the Medicare Advantage business, leading to a high medical-benefit ratio. The current stretched valuation suggests that investors may be paying a higher price relative to the company's expected earnings growth. Accordingly, this might not be the ideal time to invest in this Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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