VALUATION HIGHLIGHTS
- Health Services constitute 37% of the Trefis price estimate for CVS Health's stock.
- Pharmacy & Consumer constitutes 33% of the Trefis price estimate for CVS Health's stock.
- Health Care Benefits constitute 30% of the Trefis price estimate for CVS Health's stock.
WHAT HAS CHANGED?
- CVS Stock vs. S&P 500 Performance
The performance of CVS stock with respect to the index has been quite volatile. Returns for the stock were 55% in 2021, -8% in 2022, -13% in 2023, and -41% in 2024. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, 24% in 2023, and 23% in 2024 — indicating that CVS underperformed the S&P in 2023 and 2024.
- Q4 2024 Performance
CVS Health posted Q4 results with revenues of $97.7 billion, up 4.2% y-o-y, led by growth in Health Care Benefits and Pharmacy & Consumer Wellness segments, while Health Services revenue declined. The company's adjusted EPS of $1.19 was down 44% from $2.12 in the prior-year quarter.
- Impact of Elective Surgeries
The COVID-19 pandemic in 2020 significantly influenced CVS Health's performance. Higher unemployment rates led to an increase in enrollments in government-sponsored healthcare plans. Simultaneously, the healthcare system's focus on COVID-19 and emergency care resulted in the postponement of many elective surgeries. This shift led to a lower Medical Benefit Ratio (MBR), which decreased to 81% in 2020 from 84% in 2019, ultimately contributing to a 6% rise in the company's adjusted earnings per share to $7.50, compared to $7.08 in the previous year.
As the healthcare landscape began to recover in 2021, CVS Health's vaccine administration efforts played a key role in boosting its earnings by 12% to $8.40 per share. In 2022, the MBR stood at 84%, and adjusted earnings per share saw a further 3% increase to $8.69. By 2023, with a greater volume of elective surgeries being performed, CVS Health's MBR increased to 86.2% and further to 92.5% in 2024, weighing on the company's earnings growth lately.
- Aetna Acquisition
In November 2018, CVS Health successfully acquired 100% of the outstanding shares and voting interests of Aetna through a combination of cash and stock. As per the terms of the merger agreement, Aetna shareholders received $145 in cash and 0.8378 CVS Health shares for each Aetna share they held. The transaction valued Aetna at approximately $212 per share, totaling approximately $70 billion. When including the assumption of Aetna's debt, the overall value of the transaction reached approximately $78 billion. CVS Health financed the cash portion of the purchase price using a combination of its existing cash reserves and by issuing approximately $45 billion of new debt, which included senior notes and term loans. Aetna, a health care benefits company offering traditional, voluntary, and consumer-directed health insurance products and related services, was acquired with the strategic aim of enhancing the consumer health care experience. By integrating Aetna's health care benefits products and services with CVS Health's extensive network of approximately 9,000 retail locations (including CVS Pharmacy stores and MinuteClinic locations) and its integrated pharmacy capabilities, CVS Health intended to create a more accessible and coordinated healthcare journey for consumers.
- CVS And Its Several Partnerships To Improve Its Performance
To ensure continued growth, CVS Health has been actively pursuing strategic initiatives. This includes focusing on partnerships with various payers to increase patient volume and market share. For instance, a partnership with Cigna Health Works was announced in 2017, and CVS Health also became a retail network option for Express Scripts' Diabetes Care Value program. The company continues to engage in discussions with numerous Pharmacy Benefit Manager (PBM) health plans to further expand the reach of its network.
A significant driver of CVS Health's growth has been its $70 billion acquisition of Aetna, completed in 2018. This combination has been instrumental in providing consumers with a more integrated healthcare experience, aiming to reduce costs and improve access to care by linking CVS's extensive local presence through its pharmacies and clinics with Aetna's comprehensive healthcare benefits and services.
The acquisition of Aetna also significantly strengthened CVS's PBM business, providing it with greater negotiating leverage with drug companies. Furthermore, CVS Health has been able to offer its various services, including pharmacy benefit management, to Aetna's substantial member base of 40 million individuals.
More recently, CVS Health has continued its expansion through strategic acquisitions. In March 2023, the company finalized its acquisition of Signify Health, a provider of home healthcare services, in a deal valued at $8 billion. This was followed by the acquisition of Oak Street Health, a network of value-based primary care centers, for $10.6 billion in May 2023.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Health Services
Health Services EBITDA Margin: We project that CVS Health's EBITDA margin for its Health Services segment will increase from 5.2% in 2024 to 6.1% by the end of our analysis period. Should these margins improve further to 8% by the end of our forecast, our Trefis price estimate could see a 25% upside.
Health Care Benefits
Health Care Benefits EBITDA Margin: We currently project a substantial increase in EBITDA margins for CVS Health's Health Care Benefits segment, from 1.9% in 2024 to around 7.2% by the end of our review period. This forecast suggests a positive outlook. Additionally, if these margins were to surpass 10% during our review, our Trefis price estimate could see an upside of over 25%. Conversely, the acquisition of new contracts and the terms of contract renewals could exert downward pressure on these margins, potentially leading to a similar downside in our price estimate.
BUSINESS SUMMARY
CVS Health (NYSE: CVS)
CVS Health stands as a leading healthcare company in the US, operating an extensive network of approximately 9,000 retail pharmacy stores nationwide. Its comprehensive pharmacy services include mail-order prescription fulfillment, management of prescription plans, and efficient claims processing. Through its various business segments, CVS Health manages and fills over 2 billion prescriptions annually.
The company's retail segment offers a range of healthcare services through its more than 1,000 retail health clinics, primarily branded as MinuteClinic and located within CVS Pharmacy stores. These clinics provide diagnosis and treatment for minor health conditions. The retail business also encompasses its online pharmacy platform, CVS.com.
CVS retail stores offer a wide array of products, including prescription medications, over-the-counter (OTC) drugs, beauty supplies, cosmetics, photo finishing services, seasonal merchandise, greeting cards, and convenience foods.
As a pharmacy benefits manager (PBM), CVS Health oversees the dispensing of pharmaceuticals for its clients' benefit plan members through its automated mail-order facilities and a national network comprising thousands of retail pharmacies. The company employs sophisticated information systems to conduct safety checks, drug interaction screenings, and facilitate brand-to-generic substitutions.
SOURCES OF VALUE
CVS Health's primary sources of value are currently driven by its Health Care Benefits segment, which accounts for the majority of its total revenue, followed by its Pharmacy Services segment, and then its Retail/Long-Term Care (LTC) segment.
KEY TRENDS
Continued Increase in Demand and Utilization of Prescription Drugs in the U.S.
The increasing number of older adults in the United States is a significant factor driving the growth of the prescription drug market. In 2024, the population aged 65 and older was approximately 62 million, and projections indicate this figure will reach around 80 million by 2040. This demographic typically utilizes a higher volume of prescription medications, averaging over 25 prescriptions per person annually, which is significantly more than younger age groups. This trend is expected to continue to fuel substantial growth for both Pharmacy Benefit Management (PBM) and retail pharmacy businesses in the coming years.
Growing Adoption of Generic Drugs and Popularity of Private Label Goods Positively Impact Retail Store Profitability.
Generic medications generally offer better gross profit margins compared to their branded counterparts. The total generic dispensing rate in the U.S. has steadily increased, reaching approximately 90% in 2024, up from around 81% a decade prior. While the pace of branded drugs being replaced by generics may moderate, the continued expansion of generic drug sales contributes positively to the company's profitability.
Additionally, private label goods have gained considerable traction among consumers due to their perceived value, often offering comparable quality to national brands at a lower price point. This trend benefits CVS Health by providing significantly higher margins on these products while meeting customer demand for cost-effective options.
