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CVS Earnings: Weak Medicare Advantage Profits Cut Into 2024 Outlook

We are reducing our intermediate-term expectations for CVS, which pushed down our fair value estimate of its stock.

Securities In This Article
CVS Health Corp
(CVS)

Key Morningstar Metrics for CVS Health

What We Thought of CVS Health’s Earnings

CVS Health CVS delivered weak first-quarter results due to deflated profits in Medicare Advantage, or MA, where spiking medical utilization and mispriced plans caused insurance segment profits to decline. Meanwhile, the pharmacy benefit management business dealt with the loss of the Centene contract. Management cut its 2024 guidance primarily on the weak MA trends, and we are reducing our intermediate-term expectations for CVS, pushing our fair value estimate down to $93 per share from $103. Shares remain undervalued.

CVS is suffering as the MA enrollment winner in 2024, while medical utilization is surging in that population and insurers did not appropriately account for that medical cost increase in their June 2023 bids. CVS’ medical membership grew 4% year over year primarily on 22% growth in its MA membership and mild commercial membership growth. Unfortunately, that strong MA membership growth appears to have come with consequences for the firm’s profitability, as its medical cost ratio rose to 90% in the quarter, well above its previous 88% full-year goal at the midpoint and even above MA-focused Humana’s MCR of 89%, despite CVS’ more diverse membership base. MA profits are also suffering this year due to weak bonus payments because of a short-term weakness in CVS’ star ratings for this bonus year, which should rise going forward after its star ratings rebounded in the latest scoring cycle.

Looking forward, CVS cut its 2024 outlook on this MA profit weakness. Instead of at least $8.30 of adjusted earnings per share, CVS now expects at least $7.00, which is disappointing. On the call, management stated it still aims for low-double-digit adjusted EPS growth in 2025 as it rebounds from this weak result and higher MA star ratings boost 2025 MA bonus payments. That goal remains above the long-term outlook set at its recent analyst day of 6% intermediate-term adjusted EPS growth that accelerates to 7.5% by 2028.

CVS Health Stock vs. Morningstar Fair Value Estimate

Source: Morningstar Direct.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Julie Utterback

Senior Equity Analyst
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Julie Utterback is a senior equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. Within the healthcare industry, she covers medical technology and service companies. She is also the chairperson of the equity research team’s capital allocation methodology.

Utterback joined Morningstar in 2005 as an equity analyst in the healthcare industry. At that time, she covered medical technology companies, including orthopedic device, medical equipment, and cardiac device firms. In 2010, she joined Morningstar's credit research team, initiating coverage of the entire healthcare industry and generally helping the organization expand and maintain its credit coverage across many industries. She held that senior credit analyst role until April 2019, when she returned to the equity team to cover medical technology and service companies.

Prior to joining Morningstar, Utterback was an equity analyst at State Farm Insurance for several years. She holds a bachelor's degree in finance from the University of Illinois Urbana-Champaign. She also holds the Chartered Financial Analyst® designation.

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