Higher Medical Costs Likely Weighed On CVS Health’s Q1 Earnings

CVS Health (NYSE: CVS) will report its Q1 2024 results on Wednesday, May 1. We expect the company’s revenues to come in at $90 billion, slightly above the consensus estimate of $89.2 billion. This would mark year-over-year growth of 5.5%. Earnings will likely come in at about $1.74 on a per-share and adjusted basis, slightly above the $1.71 consensus estimate, but lower than its prior-year quarter earning of $2.20. See our interactive dashboard analysis on CVS Health Earnings Preview for more details on how the company’s revenues and earnings will likely result for the quarter. So, what are some of the trends that are likely to drive CVS Health’s results?

Firstly, let us look at its stock performance in recent years. CVS stock has seen little change, moving slightly from levels of $70 in early January 2021 to around $65 now, vs. an increase of about 35% for the S&P 500 over this roughly three-year period. Overall, the performance of CVS stock with respect to the index has been quite volatile. Returns for the stock were 51% in 2021, -10% in 2022, and -15% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that CVS underperformed the S&P in 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Health Care sector including LLY, UNH, and JNJ, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could CVS face a similar situation as it did in 2023 and underperform the S&P over the next 12 months — or will it see a strong jump? We think CVS stock is undervalued at levels of under $70. We estimate CVS Health’s valuation to be $88 per share, about 30% above its current price of $67. At its current levels, CVS is trading around 8x its forward expected earnings of $8.35 on a per-share and adjusted basis for the full-year 2024. This is lower than the stock’s average P/E multiple of 10x over the last five years.

Looking at the previous quarter, CVS Health’s revenue of $93.8 billion in Q4 was up 12% y-o-y, with sales growth across all segments. Health Care Benefits sales increased by 16%, Health Services sales were up 12%, and Pharmacy & Consumer Wellness revenue was up 9%.  The company’s adjusted operating margin declined by 40 bps to 4.5% in Q4. This can partly be attributed to a 270 bps rise in medical benefit ratio (MBR) to 88.5%. This resulted in an adjusted profit of $2.12 per share, reflecting only a 4% rise from its $2.04 figure in the prior-year-quarter.

Coming to the latest quarter, CVS will likely continue to benefit from the steady growth of its healthcare and pharmacy services businesses. The increased prescription volume and drug price inflation will likely drive the top-line expansion. The company will also benefit from its last year’s acquisitions of Signify Health and Oak Street Health. However, higher costs, primarily benefits costs, probably weighed on its overall performance. We expect the company to post a medical benefits ratio of over 86% in Q1, compared to 84.6% in the prior-year quarter. 

Although we expect the company to post a decline in earnings, partly due to increased medical costs in Q1, we think its stock is attractive and investors can pick CVS stock for robust long-term gains.

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