Will Trump Victory Take CVS Stock Higher?

CVS Health stock (NYSE: CVS) is up over 10% on Wednesday, November 6. The broader markets as well as the health insurance stocks are rallying after the Trump victory. Other than CVS, UnitedHealth stock (NYSE:UNH) is up 5%, and Humana stock is up 8%. Now, CVS also reported its quarterly results today, with revenue exceeding but earnings missing the street estimates. The company reported sales of $95.4 billion and adjusted earnings of $1.09 per share, compared to the consensus estimates of $92.8 billion and $1.51, respectively. Let’s dive deeper into the company’s results and the impact on its valuation, especially with Trump’s victory. In addition, for more election impact see Tesla Stock To $1,000?

How Did CVS Fare In Q3?

CVS Health’s revenue of $95.4 billion in Q3 was up 6% y-o-y, led by growth in Health Care Benefits, which saw a solid 25.5% y-o-y growth, with improvement in both Medicare and Commercial plans. The Pharmacy & Consumer Wellness segment saw its sales rise by 12.3%, led by increased prescription volume and pharmacy drug mix. However, Health Services revenue fell 5.9%. This can be attributed to the loss of a large client and pharmacy client price improvements.

The company’s adjusted operating margin improved by 100 bps y-o-y to 4.0% in Q3. CVS’ bottom line stood at $1.05 on an adjusted basis, versus $2.21 in the prior-year quarter. The current quarter earnings were impacted by a $0.63 per share charge related to premium deficiency reserves.

One of the most watched metrics for CVS is its medical benefits ratio (MBR), which refers to health care costs as a percentage of premium revenues, surged to 95.2% in Q3, versus 85.7% in the year-ago-period. The company didn’t provide guidance for Q4.

What Does This Mean For CVS Stock?

Any other day, CVS stock would have probably taken a hit, with a very high MBR figure. It seems the medical costs will remain elevated in the near term. That said, there are a few positives to look forward to. 1. The company expects some benefit in Q4 from the premium deficiency reserves being released. 2. The company is undergoing restructuring (announced in the previous quarter) aimed at improving efficiency and reduce costs. 3. Changes in the management, with Steve Nelson to now be the head of Aetna. He is the former CEO of UnitedHealthcare division of UnitedHealth Group. Beyond these factors, there is a Trump factor, which is in play today. The investors are now hoping that the government under Trump will offer better pricing for insurance companies to cover senior citizens under private plans.

While we are yet to update our model for CVS to reflect the recent quarterly results, our current estimate for CVS Health’s Valuation is at $66 per share. Our forecast was based on a 10x P/E multiple for CVS and expected earnings of $6.61 on a per-share and adjusted basis for the full year 2024. The 10x figure aligns with the stock’s average P/E ratio over the last five years. However, with the Q3 earnings of $1.09, it’s likely that CVS’ full-year earnings may now be short of $6 per share, making the stock fully valued at current levels of around $61. Now, investors may choose to offer a premium to the valuation multiple for healthcare stocks under the Trump administration, which may take the stock to higher levels.

Owing to higher medical costs and its impact on profitability, CVS stock is down 24% this year, underperforming the broader markets, with the S&P 500 index rising 21%. Even if we look at a slightly longer period, 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, and -13% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is much less volatile. And it 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.

[1] Returns as of 11/6/2024
[2] Cumulative total returns since the end of 2016