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CVS Earnings: Management Pulls Intermediate Targets, Despite Decent Trends and 2023 Outlook

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CVS Health Corp
(CVS)

Narrow-moat CVS Health CVS delivered solid second-quarter results and maintained its 2023 outlook but reduced its 2024 and 2025 goals. Slight changes to our intermediate-term assumptions, which were already below management’s previous targets, do not materially change our $113 fair value estimate, though. CVS shares remain significantly undervalued, in our view.

In the quarter, CVS turned in solid results, including 10% revenue growth, but increased utilization in its medical insurance business and a tough comparable period for its retail stores cut into its adjusted EPS, albeit above expectations. The medical insurer delivered solid membership growth (5%) on stellar individual exchange growth, decent Medicare Advantage growth despite weak MA star ratings, and a mid-single-digit decline in Medicaid as redetermination activities began. Considering higher Medicare medical utilization in the period, the insurance segment’s adjusted operating profit declined 20% year over year. The retail store segment’s adjusted operating profits also declined 17%, as it faced a tough comparable period postpandemic. These weak trends were too tough for decent pharmacy benefit manager and healthcare services results to fully offset.

Management maintained its near-term targets but, disappointingly, reduced its intermediate-term goals. Specifically, in 2023, CVS still expects adjusted EPS of $8.50-$8.70 and operating cash flow of $12.5 billion-$13.5 billion, which are in line with our expectations. However, the firm has reduced its outlook for 2024 to $8.50-$8.70 (down from about $9 previously) on a variety of growing company and industry-specific challenges such as in Medicare Advantage, and the company pulled its 2025 expectation for $10 per share, as well. Our $113 fair value estimate already incorporates slightly weaker expectations than management’s previous outlook, and mild adjustments to our intermediate-term assumptions do not materially affect our view of CVS.

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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