CVS Health announced on Wednesday that it will not meet its previously set earnings targets for 2024 and 2025, casting doubts on the company’s long-term profit growth. While the healthcare giant reported second-quarter earnings that exceeded Wall Street estimates, concerns over rising medical costs for its health insurance division, particularly within its Medicare Advantage business, led to a 2.4% drop in premarket shares.
Medicare Advantage Drives Higher Medical Costs
CVS Health, known for owning retail pharmacies, a health insurance company, and a pharmacy benefit manager, reported adjusted earnings of $2.21 per share in Q2 from revenue totaling $88.9 billion. The company’s health insurance division faced challenges due to increased medical costs in its Medicare Advantage offerings, private plans provided through the government-sponsored Medicare program. The medical benefit ratio, reflecting the percentage of premiums spent on medical expenses, rose to 86.2%, surpassing the FactSet consensus estimate of 84.4%.
2023 Forecast Maintained
Despite reaffirming its 2023 adjusted profit forecast of $8.50 to $8.70 per share, CVS Health’s CFO, Shawn Guertin, stated on an investor call that the prior earnings per share targets for 2024 and 2025 were no longer achievable. CVS had originally aimed for earnings of $9 per share in 2024 and $10 per share in 2025. In light of a more challenging outlook for 2024 and other uncertainties, Guertin advised investors to reset their expectations for 2024 earnings to a range of $8.50 to $8.70 per share, effectively flat compared to the existing 2023 guidance.
CVS Health Corp Stock Analysis
According to a consensus of 17 analysts, CVS Health Corp’s average target price is projected to be USD 100.21 in the upcoming 12 months. The analysts’ overall sentiment towards the stock is rated as “Strong Buy.” However, Stock Target Advisor’s analysis has a slightly bearish outlook, considering 6 positive signals and 8 negative signals.
Currently, CVS Health stock price stands at USD 73.95, based on the last closing. It has experienced a decline of -2.63% over the past week but has shown a positive gain of +6.97% in the past month. Nevertheless, over the course of the last year, the stock price has decreased significantly by -22.98%.
Uncertainty Casts Shadows Over CVS’s Earnings Growth
Factors contributing to the company’s altered outlook include uncertainties in the Medicare Advantage sector and concerns over a potentially weakening consumer environment. Additionally, the Centers for Medicare and Medicaid Services’ quality rating reductions for some of CVS’s Medicare Advantage plans resulted in an $800 million loss in bonus payments for 2024. CVS had previously planned share repurchases to boost its 2024 adjusted earnings to $9.75 to $9.95 per share, but acknowledged that this strategy alone would not strengthen the company’s overall positioning.
Investor Worry Mounts as CVS Faces Challenges
Investors have been anxious about CVS’s earnings growth, particularly after the recent quality rating reductions on its Medicare Advantage plans. The downward pressure on shares resulted in a 21% decline year-to-date, while the S&P 500 index rose by about 19%.
Job Cuts and Industry Challenges
As part of its effort to manage costs, CVS Health will cut approximately 5,000 jobs, mainly in corporate roles. The move comes amid broader pressures faced by the company from multiple fronts.
Conclusion
Although CVS Health’s second-quarter earnings beat expectations, the challenges posed by increased medical costs in its Medicare Advantage business and uncertainties in the consumer environment have led the company to revise its long-term earnings targets for 2024 and 2025. Despite maintaining confidence in its long-term strategy, CVS’s readjusted outlook may raise concerns among investors and heighten pressure on the healthcare giant in the coming months.
