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CVS Earnings: Management Gives Cautious Near-Term Outlook Due to Elevated Medical Utilization

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Narrow-moat CVS Health CVS delivered solid third-quarter results and maintained its 2023-24 outlook. Our estimates appear near management’s near-term guidance ranges, and at first glance, our $103 fair value estimate remains intact and well above recent share prices.

CVS turned in solid results, including 11% revenue growth, but increased medical utilization and a tough retail store environment constrained adjusted EPS growth to just 2%. The medical insurer delivered 6% membership growth on stellar individual exchange growth, decent Medicare Advantage growth despite weak MA star ratings, and a low-single-digit decline in Medicaid as redetermination activities continued. With elevated medical utilization in the period, though, the insurance segment’s adjusted operating profit declined 6% year over year. The retail store segment’s adjusted operating profit remained flat, as it faced a tough comparable period as the pandemic eases. These weak trends constrained total results, despite decent pharmacy benefit manager and healthcare services results of 11% adjusted operating income growth.

Management largely maintained its near-term guidance. For 2023, CVS still expects adjusted EPS of $8.50-$8.70 and operating cash flow of $12.5 billion-$13.5 billion, in line with our expectations. The company also reiterated its 2024 adjusted EPS outlook for $8.50-$8.70, although it highlighted that the low end of that range was most likely due to near-term utilization and MA challenges. Longer term, CVS’ new MA star ratings have improved substantially, suggesting last year’s MA star ratings were a fluke, and could positively influence 2024 marketing and 2025 bonus payments. Therefore, CVS’ earnings growth prospects look likely to improve after 2024. But whether CVS can deliver on its double-digit earnings growth target on a durable basis remains an open question, given growing challenges in the PBM business and a tough retail environment.

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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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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