CVS Earnings: Full Extent of Weakness Seen in Aetna Operations

Key Morningstar Metrics for CVS Health

• Fair Value Estimate: $93.00
• Morningstar Rating: 5 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

What We Thought of CVS Health’s Earnings

After a preliminary announcement a few weeks ago that included a CEO change, CVS Health CVS released its full third-quarter earnings results. The firm’s info highlighted weaknesses in its Aetna medical insurance operations. The earnings call also featured a first look at David Joyner in his new CEO role; he previously led the Caremark pharmacy benefit management business. While CVS refrained from giving guidance, at first glance, we are not changing our fair value estimate of $93 per share. Shares remain cheap, and investors should note that Republican Party wins in the US election could ease pressures a bit on the Medicare Advantage business, which has roiled CVS’ results so much in 2024.

As expected after the preliminary release, CVS delivered weak third-quarter results, related to the ongoing mismatch in rates and the elevated medical utilization in key markets like Medicare Advantage and the individual exchanges. The company delivered $1.09 of adjusted EPS, in line with the preliminary results highlighted a few weeks ago but well below FactSet consensus of $1.69 prior to that preliminary announcement. Because of the ongoing mismatch between rates and utilization in its medical insurance membership, CVS had to take a premium deficiency reserve charge in the quarter worth about $0.63 per share, as the firm’s medical loss ratio spiked substantially to 95% from 86% a year ago. This segment’s weakness accounted for most of the company’s 43% adjusted operating profit decline in the quarter.

The rest of CVS performed admirably. The healthcare services segment, which includes the PBM and healthcare services operations, grew adjusted operating profits by 17%, as growth in healthcare services and specialty pharmacy offset the loss of the Centene PBM contract. Even the retail pharmacy stores looked strong with 15% adjusted operating profit growth on strong volume trends in a rising medical utilization environment and improved drug purchasing dynamics, despite ongoing reimbursement pressure.