CVS Health CVS shareholders are experiencing a rough period as the stock continues to face significant downward pressure. Recent reports about the company's strategic restructuring plans have placed the healthcare giant back in the headlines, raising concerns about its long-term stability and growth prospects. To address mounting financial pressure, CVS is reportedly considering a strategic restructuring that involves reducing costs by $2 billion, which could result in 2,900 job cuts.
Accordingly, CVS Health experienced a significant dip in its share price, with its stock currently trading close to its 52-week low. Since Dec. 17, the stock has consistently traded below $46.00 per share, closing at $45.77 yesterday and just above its 52-week low of $43.56, reached on Dec. 23.
The stock has lost 29.9% in the past three months, underperforming the Zacks Retail - Pharmacies and Drug Stores industry’s 29% dip and the S&P 500's growth of 3.8%. During this period, the Retail sector rose 7%. Notably, CVS has also underperformed its direct peers and behemoths like Walgreens Boots WBA and Herbalife HLF in the past three months. During the said time frame, WBA gained 7.1%, while HLF lost 3.2%.
Three-Month Price Comparison
Image Source: Zacks Investment Research
CVS Below Moving Averages
Technical indicators, too, are showing further resistance to CVS Health’s growth momentum. The stock is trading below its 50-day and 200-day moving averages, indicating chances of further downward momentum and price instability. This technical indicator reflects the market’s lack of confidence in CVS Health’s financial health and fundamentals both for the short and long term.
50 & 200-Day SMA
Image Source: Zacks Investment Research
Meanwhile, earnings estimates for CVS Health have slipped 17.5% to $5.29 per share for 2024 over the past 60 days, with 12 downward revisions in contrast to one upward movement. For 2025, estimates have declined 14.1% to $6.14 in two months following 11 downward revisions and one upward movement.
Image Source: Zacks Investment Research
For shareholders, the combination of declining stock performance, substantial job cuts and operational challenges presents a challenging landscape.
Industry-wide Pharmacy Reimbursement Crisis
We note that 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, shrinking margins and earnings are pretty alarming.
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, the 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 what it collected 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 in early 2025.
Expensive Valuation
In terms of valuation, CVS Health’s forward 12-month price-to-earnings (P/E) is 7.44X, a premium to the broader industry average of 6.99X. The company is also trading at a significant premium to other industry players like Walgreens Boots (6.44X) and Herbalife (3.97X). This suggests that investors may be paying a higher price relative to the company's expected earnings growth.
Image Source: Zacks Investment Research
2025 Might Provide a Better Picture
CVS Health is optimistic regarding its path forward in 2025 and beyond, which involves strengthening its positioning in Medicare Advantage. In June 2024, the company submitted its bids for the plan following a rigorous internal review. 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 the year, as well as how the market responds to those trends.
Furthermore, CVS’ subsidiary Signify Health continues to show impressive growth and is building momentum for 2025. CVS Health is progressing on its innovative pharmacy models and biosimilar strategy, delivering wins in both Caremark and Aetna selling season and also fast 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. Supported by strong leadership and a powerful collection of businesses in some of the most critical areas of healthcare, CVS Health aims to deliver value for customers, colleagues and shareholders.
Our Take
Thanks to several business-specific and industry-wide factors, the market has not been impressed with CVS Health this year. In addition to the ongoing controversy related to massive job cut, the company has been grappling with a sudden increase in Medicare Advantage members’ utilization trend within the Health Care Benefits segment, where an increasing number of members are opting for health benefits.
The stock is currently positioned below its 50-and 200-day moving averages. Accordingly, we consider the possibility of a resistance or further pullback in share price going forward. 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 company holding brighter prospects for 2025, this might not be the ideal time to invest in CVS Health. While current shareholders should hold their positions, new investors should wait for this Zacks Rank #3 (Hold) stock to retract some of its recent gains and provide a better entry point.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Zacks' Research Chief Names "Stock Most Likely to Double"
Our team of experts has just released the 5 stocks with the greatest probability of gaining +100% or more in the coming months. Of those 5, Director of Research Sheraz Mian highlights the one stock set to climb highest.
This top pick is among the most innovative financial firms. With a fast-growing customer base (already 50+ million) and a diverse set of cutting edge solutions, this stock is poised for big gains. Of course, all our elite picks aren’t winners but this one could far surpass earlier Zacks’ Stocks Set to Double like Nano-X Imaging which shot up +129.6% in little more than 9 months.
CVS Health Corporation (CVS) : Free Stock Analysis Report
Herbalife Ltd (HLF) : Free Stock Analysis Report
Walgreens Boots Alliance, Inc. (WBA) : Free Stock Analysis Report
To read this article on Zacks.com click here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
