CVS Health CVS stock closed at $55.29 on Friday, near its 52-week low of $52.71. The stock has plunged 30% year to date, reflecting the underlying challenges of the retail pharmacy industry. The company also posted disappointing third-quarter 2024 results last month.

However, this PBM and pharmacy retail powerhouse has outperformed the broader Retail Pharmacy and Drug Store industry, which plunged 37.3% during this period. Major competitors of CVS Health — Herbalife Ltd HLF and Walgreens Boots WBA — registered a sharper decline of 47.8% and 67.2%, respectively, during this period.

YTD Share Performance

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Meanwhile, earnings estimates for CVS Health have slipped 13.1% to $5.32 per share for 2024 over the past 30 days, with nine downward revisions in contrast to no upward movement. For 2025, estimates have declined 10.6% to $6.22 in a month following eight downward revisions and no upward movement.

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Industry-wide Pharmacy Reimbursement Crisis

The entire retail pharmacy industry is currently grappling with continued pressure from non-reimbursable pharmacy expenses, which are significantly pulling down mass demand for prescription as well as over-the-counter drugs and vaccinations. Going by a National Association of Chain Drugs report, payors are substantially shrinking reimbursement, many times below the cost of buying and dispensing prescription drugs. This is putting substantial and unsustainable financial pressure on companies to the extent that many of the industry players over the past year were seen shutting down their businesses, reducing the number of stores or going private.

CVS Health, like its industry peers, is severely affected by this ongoing crisis. In fact, despite the company reporting revenue expansion, the shrinking margins and earnings are pretty alarming.

High Utilization Grossly Hurts CVS' Profitability

The persistently elevated utilization of medical services is putting significant pressure on CVS Health’s Health Care Benefits segment. The trend was observed since early last year when the division experienced a higher than previously expected medical cost trend in Medicare Advantage due to increased outpatient and supplemental benefit utilization compared with pandemic-influenced utilization levels in the prior year. On top of that, CVS Health recorded a premium deficiency reserve of $766 million in the third quarter due to a premium deficiency in its Medicare product line related to the 2024 coverage year. This continued elevated utilization may lead to record additional premium deficiency reserves in the segment in the fourth quarter of 2024.

Escalating Medical Benefit Ratio a Cause of Concern

CVS Health’s Medicaid business is experiencing medical cost pressure from higher-than-expected acuity following the resumption of member redeterminations. During the third quarter, medical benefit ratio (MBR) of 95.2% increased 950 basis points year over year.  A higher MBR typically indicates that the company paid out more in benefits than collected more in premiums, resulting in lower profitability. CVS Health also witnessed unfavorable development of 2024 medical costs related to second-quarter dates of service, which adversely impacted its trend outlook for the rest of 2024. Medical costs in the individual exchange business also accelerated in the third quarter, with broad levels of higher utilization and surging medical costs in certain high-cost geographies.

CVS Health increased its risk adjustment accrual for its individual exchange business by approximately $275 million in the third quarter due to updated data. The company will continue to evaluate its revenue accruals for potential additional pressure as it receives updated data on the risk scores later this year and into early 2025.

CVS Shares Are Expensive

In terms of valuation too, CVS Health’s forward 12-month price-to-earnings (P/E) is 8.96X, a premium to the market's average of 8.39X. The company is also trading at a significant premium to other industry players like Walgreens Boots (5.68X) and Herbalife (4.68X). This suggests that investors may be paying a higher price relative to the company's expected earnings growth. It also has a Value Score of A.

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Our Take

The stock’s stretched valuation suggests that investors may be paying a higher price relative to the company's expected earnings growth. Accordingly, despite the continued 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 #5 (Strong 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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