As healthcare spending continues to rise and regulatory pressure intensifies, companies like CVS Health CVS find themselves in a complex landscape. However, in spite of these hurdles, the company managed to report better-than-expected fourth-quarter 2024 results last week and provided an encouraging outlook for 2025, strengthening investor confidence in its ability to weather these headwinds.

The stock has surged 26.6% in a month, outperforming the S&P 500’s 1.9% gain. The stock also largely outperformed its direct competitors Herbalife Ltd HLF and Walgreens Boots’ WBA decline of 14.4% and 22.5%, respectively, during this period.

One-Month Price Comparison

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Q4 Results in a Nutshell

For the fourth quarter of 2024, CVS Health reported total revenues of $97.71 billion, a 4% increase from the same period in the previous year. The top line surpassed the Zacks Consensus Estimate by 0.6%. However, adjusted EPS of $1.19 marked a 43.9% year-over-year decline.

CVS Health’s Health Services segment witnessed a 4% year-over-year decline. This soft performance was primarily attributed to the previously announced loss of a large client and ongoing pharmacy client price improvements, which weighed on overall revenue growth. Despite a favorable shift in the pharmacy drug mix, increased contributions from CVS Health's healthcare delivery assets and growth in specialty pharmacy, the overall segment faced pressure, influencing the company’s quarterly performance.

On the other hand, CVS Health’s Pharmacy and Consumer Wellness segment delivered a strong performance, with revenues exceeding $33 billion, reflecting a 7% year-over-year increase and more than 10% growth on a same-store basis. Same-store pharmacy sales grew 13% year over year, with same-store prescription volumes up nearly 6%. However, adjusted operating income for the segment declined 13% to nearly $1.8 billion. This was mainly due to ongoing pressure from pharmacy reimbursement rates and lower front store volumes, though improvements in drug purchases helped offset some of these challenges. Additionally, results were impacted by the pull-forward of immunizations into the third quarter.

CVS Health's Healthcare Benefit business saw revenue growth of more than 23% to approximately $33 billion. Medical membership remained stable sequentially at 27.1 million, though individual exchange membership declined in anticipation of 2025 rate increases. However, the segment posted an adjusted operating loss of $439 million, impacted by a higher medical benefit ratio (MBR) of 94.8%. Factors like higher utilization, lower star ratings and Medicaid acuity contributed to the increase in MBR. Despite challenges, CVS remains optimistic about 2025 changes to benefit designs, particularly in Medicare and individual exchange segments, aimed at improving future results.

2025 Outlook Impressive

CVS Health projects an adjusted EPS between $5.75 and $6.00. This compares to 2024 adjusted earnings of $5.42 per share. This outlook reflects expectations of a meaningful recovery in the Aetna business, particularly in Medicare Advantage and continued growth in Health Services.

In its healthcare benefits segment, CVS anticipates a decline of over 1 million members, primarily due to reductions in individual exchange and Medicare products. However, growth in the commercial self-insured business is expected to partially offset this. The company projects healthcare benefits revenues of around $132 billion, with a focus on improving its medical benefit ratio.

CVS expects its health services segment to grow 4%, with Caremark driving significant revenues. Overall, CVS remains optimistic about unlocking embedded earnings potential in 2025.

Q1 Estimates Move Upward for CVS

Meanwhile, earnings estimates for CVS Health have increased 7% to $1.52 per share for the first quarter of 2025 over the past seven days, with three upward revisions in contrast to no downward movement.

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Not only this, the stock, which struggled to keep pace over the past few months, 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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Industry-wide Pharmacy Reimbursement Crisis a Major Snag

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 Shares are Expensive Too

In terms of valuation too, CVS Health’s forward 12-month price-to-earnings (P/E) is 11.02X, a premium to the company’s competitor WBA’s average of 6.32X. The company is also trading at a significant premium to Herbalife (3.31X). 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’s performance in the fourth quarter was overall satisfactory backed by impressive revenue growth. This was driven by its strategic investments in expanding healthcare services, including its health hubs and partnerships in the Medicare market. As it continues to innovate with digital health solutions and further strengthen its clinical capabilities, CVS Health's outlook for 2025 and beyond remains positive.

However, a mix of industrywide and company-specific challenges are putting pressure on its operations and financial performance. 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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