CVS Health Earnings: Shares Rise, Weak 2025 Guidance

Key Morningstar Metrics for CVS Health

• Fair Value Estimate: $86.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

What We Thought of CVS Health’s Earnings

CVS Health CVS turned in solid fourth-quarter results, and its 2025 guidance for 6%-11% adjusted EPS growth without any share repurchase activity appeared to relieve the market. Shares rose in the mid-teens percentage in early trading on this news.

Why it matters: With new management at the helm, the market appears to appreciate that further profit deterioration is unlikely in 2025.

• However, the firm’s 2025 guidance looks well below our profit and free cash flow estimates, as the firm may continue to struggle with ongoing challenges in Medicare Advantage, Medicaid, and Medicare Part D, related to a mismatch in rates and utilization.
• Given how weak CVS' 2024 performance was in its Aetna medical insurance operations, it may take years to return to more normalized margins, particularly in Medicare Advantage. Positively, management highlighted that it has $3-$4 of EPS upside if MA margins reach its target.

The bottom line: We are reducing our fair value estimate on CVS to $86 per share from $93 to reflect the weaker expectations for 2025 and a slower turnaround thereafter, given the challenges CVS faces in its Aetna medical insurance operations in particular.

• With weak expected profits at CVS, ROICs have fallen below WACC, and we currently place no value on its narrow economic moat rating in our model.
• However, we assume a significant improvement in CVS' profits and cash flows over time, including a return to a more normalized $10 billion in free cash flow generation after a particularly weak year expected in 2025 of around $4 billion.

Coming up: In the next few months, we expect to hear more about Republican priorities for regulatory changes in the industry. While headline risks create uncertainty, we think potential downside risks for CVS profits are largely reflected in its heavily discounted shares.