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