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CVS Q3 Estimates Plunge Before Earnings Release: How to Play the Stock
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CVS Health Corporation (CVS - Free Report) is scheduled to report third-quarter 2024 results on Nov. 6, before the opening bell.
In the last reported quarter, the company’s adjusted earnings of $1.83 exceeded the Zacks Consensus Estimate by 5.17%. CVS Health beat estimates in three of the trailing four quarters and missed in one, the average positive surprise being 2.02%.
The Zacks Consensus Estimate for third-quarter revenues is pegged at $92.87 billion, suggesting growth of 3.5% year over year. The consensus estimate for third-quarter earnings is pegged at $1.57 per share, implying a 28.9% decline on a year-over-year basis.
Q3 Estimates for CVS Down 12 Cents in a Week
Earnings estimates for CVS Health have plunged from $1.69 per share to $1.57 for the third quarter over the past seven days.
Image Source: Zacks Investment Research
Estimates have been southbound following the sudden stepdown of CEO Karen Lynch from her position just a week ago. The company’s preliminary earnings guidance for the third quarter announced simultaneously also remained below market expectation while demonstrating significant incurring of medical costs. This also pulled the share price down by 10.8% in just a week.
Stay up-to-date with all quarterly releases: See Zacks Earnings Calendar.
Let’s look at how things have shaped up for CVS Health before the announcement.
Factors to Focus on Ahead of CVS' Q3 Earnings
Following Lynch’s resignation due to some unspecified “agreement” with CVS Health’s board, David Joyner has been appointed president and chief executive officer, effective Oct. 17. While the company was not fully open about the reason behind a sudden upper management churn, the market has taken this event on a bearish note just ahead of the third-quarter earnings release.
Prior to the event, the Zacks Consensus Estimate was $1.69, suggesting a 23.5% decline from the year-ago reported number. However, while announcing the higher management repositioning and replacement, the company curbed its earnings projections well below our expectations.
CVS' Q3 Preliminary Outlook Falls Below Expectations
The preliminary guidance for third-quarter 2024 adjusted earnings per share is in the range of $1.05-$1.10, significantly below the Zacks Consensus Estimate at that time.
According to CVS Health, results for the third quarter will include charges to record premium deficiency reserves (PDRs), primarily related to the company’s Medicare and Individual Exchange businesses inside its Health Care Benefits segment, of approximately $1.1 billion. This supposedly lowered the third-quarter 2024 preliminary adjusted EPS figure by 63 cents.
Q3 Projection for Health Care Benefits
Within this segment, the company has already been grappling with a sudden increase in Medicare Advantage members’ utilization trend, where an increasing number of members are opting for health benefits. This is materially impacting results. CVS Health is particularly facing outpatient and supplemental benefits pressure. Added to this, the company is also witnessing new pressure emerging from inpatient categories, RSV vaccines and other pharmacy benefits. This is leading to a significant rise in the company’s medical costs, resulting in huge margin burdens. The company originally expected this utilization pressure to gradually fade in 2024. However, later, CVS Health announced that Medicare Advantage utilization might continue through 2024. This is likely to be reflected in the company’s third-quarter results prominently.
The Medicaid business is expected to have experienced medical cost pressure, largely driven by higher acuity from member redeterminations.
Overall, in the third-quarter preliminary outlook released on Oct. 18, the company noted that through the months of the quarter, it continued to experience medical cost trends in excess of those projected in its prior outlook. The Medical Benefit Ratio (“MBR”) for the third quarter is currently expected to be approximately 95.2%, which includes a 220-basis point impact from the PDRs.
In light of continued elevated medical cost pressure in the Health Care Benefits segment, the company also asked investors to no longer rely on CVS Health’s previous guidance provided on its second-quarter 2024 earnings call.
The Zacks Consensus Estimate for CVS’ Health Care Benefits arm revenues is pegged at $32.13 billion for the third quarter of 2024.
Health Services
During the company’s third-quarter preliminary outlook announcement, CVS Health noted that its other segments performed consistent with prior projections for the third quarter.
In this line, in the to-be-reported quarter, the segment is expected to have faced pressure from the loss of a large client and continued pharmacy client price increases. However, these downsides are expected to have been offset by pharmacy drug mix, growth in specialty pharmacy and accretive contributions from the acquisitions of Oak Street Health and Signify Health. We expect CVS to have continued to promote the greater adoption of biosimilars and increase the affordability of these critical specialty drugs for its clients and their members. Cordavis is likely to have played a crucial role in reducing drug costs and ensuring a consistent supply of affordable, high-quality biosimilars for patients. All these trends are likely to have favored the company’s top line in the third quarter of 2024.
The Zacks Consensus Estimate for the Health Services arm’s revenues is pegged at $42.32 billion for the third quarter of 2024.
Pharmacy & Consumer Wellness
In the to-be-reported quarter, the segment’s performance is expected to have been driven by increased prescription volume and pharmacy drug mix. CVS may have continued to provide access to critical immunizations in the communities it serves and delivered on pharmacy performance measures for health plan partners. Both same-store sales and same-store prescription volumes are expected to have increased year over year in the third quarter of 2024, benefiting CVS’ top line.
We also expect the company to make notable progress with the new CVS CostVantage model, which promises greater transparency and simplicity and represents a significant shift from the traditional pharmacy reimbursement model.
However, continued pharmacy reimbursement pressure, the impact of recent generic introductions and lower front store volumes might have dented growth in the third quarter.
Meanwhile, the company is likely to have progressed in its store closure initiative, with plans to close 900 stores by the end of this year. The decrease in store count, along with the impact of recent generic introductions and continued reimbursement pressure, may have dented the segment’s growth rate in the to-be-reported quarter, thus affecting CVS’ operational performance.
The Zacks Consensus Estimate for the Pharmacy & Consumer Wellness segment is pegged at $30.93 billion for the third quarter of 2024.
What Our Model Suggests
Per our proven model, stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), along with a positive Earnings ESP, have a higher chance of beating estimates, which is not the case here:
Earnings ESP: CVS Health has an Earnings ESP of -12.28%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: The company currently carries a Zacks Rank #4 (Sell).
CVS Shares Outperform Industry, Underperforms Sector and S&P
Year to date, shares of CVS Health have lost 28.1%. The stock has outperformed the Retail Pharmacies and Drug Store’s 35.1% dip. However, CVS shares underperformed the Zacks Retail sector’s increase of 20.2% and the S&P 500’s rise of 22.7%. The company's direct peers like Herbalife (HLF - Free Report) and Walgreens Boots Alliance (WBA - Free Report) registered a respective plunge of 54.3% and 64.2% in their stock prices during this period.
YTD Price Comparison of CVS
Image Source: Zacks Investment Research
Key Valuation Metric
From a valuation standpoint, CVS Health’s forward 12-month price-to-earnings (P/E) is 7.99X, a premium to the industry's average of 7.66X. The company is also trading at a significant premium to other industry players like Walgreens Boots, with its current P/E being 5.94, and Herbalife, whose current P/E is 7.7X. This suggests that investors may be paying a higher price relative to the company's expected earnings growth.
Image Source: Zacks Investment Research
Final Thoughts on CVS
CVS Health’s third-quarter 2024 earnings are likely to have been hit significantly by increased medical costs within the Health Care Benefits business. This apart, the entire retail pharmacy industry is currently grappling with continued pressure from non-reimbursable pharmacy expenses, which are pulling down mass demand for prescription as well as over-the-counter drugs and vaccinations. The company, along with its peers like Walgreens Boots and Herbalife, has been severely affected by this ongoing crisis. To tackle this issue, CVS Health has launched its store closure initiative, which is again denting the company’s revenues.
Meanwhile, no significant growth prospects until 2025 and a stretched valuation make the stock a risky bet. Accordingly, despite the recent dip in share prices, this might not be the ideal time to invest in CVS Health. In fact, those who already own this stock may consider selling it ahead of its earnings release, taking into account the company’s disappointing preliminary third-quarter 2024 outlook.
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CVS Q3 Estimates Plunge Before Earnings Release: How to Play the Stock
CVS Health Corporation (CVS - Free Report) is scheduled to report third-quarter 2024 results on Nov. 6, before the opening bell.
In the last reported quarter, the company’s adjusted earnings of $1.83 exceeded the Zacks Consensus Estimate by 5.17%. CVS Health beat estimates in three of the trailing four quarters and missed in one, the average positive surprise being 2.02%.
The Zacks Consensus Estimate for third-quarter revenues is pegged at $92.87 billion, suggesting growth of 3.5% year over year. The consensus estimate for third-quarter earnings is pegged at $1.57 per share, implying a 28.9% decline on a year-over-year basis.
Q3 Estimates for CVS Down 12 Cents in a Week
Earnings estimates for CVS Health have plunged from $1.69 per share to $1.57 for the third quarter over the past seven days.
Image Source: Zacks Investment Research
Estimates have been southbound following the sudden stepdown of CEO Karen Lynch from her position just a week ago. The company’s preliminary earnings guidance for the third quarter announced simultaneously also remained below market expectation while demonstrating significant incurring of medical costs. This also pulled the share price down by 10.8% in just a week.
Stay up-to-date with all quarterly releases: See Zacks Earnings Calendar.
Let’s look at how things have shaped up for CVS Health before the announcement.
Factors to Focus on Ahead of CVS' Q3 Earnings
Following Lynch’s resignation due to some unspecified “agreement” with CVS Health’s board, David Joyner has been appointed president and chief executive officer, effective Oct. 17. While the company was not fully open about the reason behind a sudden upper management churn, the market has taken this event on a bearish note just ahead of the third-quarter earnings release.
Prior to the event, the Zacks Consensus Estimate was $1.69, suggesting a 23.5% decline from the year-ago reported number. However, while announcing the higher management repositioning and replacement, the company curbed its earnings projections well below our expectations.
CVS' Q3 Preliminary Outlook Falls Below Expectations
The preliminary guidance for third-quarter 2024 adjusted earnings per share is in the range of $1.05-$1.10, significantly below the Zacks Consensus Estimate at that time.
According to CVS Health, results for the third quarter will include charges to record premium deficiency reserves (PDRs), primarily related to the company’s Medicare and Individual Exchange businesses inside its Health Care Benefits segment, of approximately $1.1 billion. This supposedly lowered the third-quarter 2024 preliminary adjusted EPS figure by 63 cents.
Q3 Projection for Health Care Benefits
Within this segment, the company has already been grappling with a sudden increase in Medicare Advantage members’ utilization trend, where an increasing number of members are opting for health benefits. This is materially impacting results. CVS Health is particularly facing outpatient and supplemental benefits pressure. Added to this, the company is also witnessing new pressure emerging from inpatient categories, RSV vaccines and other pharmacy benefits. This is leading to a significant rise in the company’s medical costs, resulting in huge margin burdens. The company originally expected this utilization pressure to gradually fade in 2024. However, later, CVS Health announced that Medicare Advantage utilization might continue through 2024. This is likely to be reflected in the company’s third-quarter results prominently.
The Medicaid business is expected to have experienced medical cost pressure, largely driven by higher acuity from member redeterminations.
Overall, in the third-quarter preliminary outlook released on Oct. 18, the company noted that through the months of the quarter, it continued to experience medical cost trends in excess of those projected in its prior outlook. The Medical Benefit Ratio (“MBR”) for the third quarter is currently expected to be approximately 95.2%, which includes a 220-basis point impact from the PDRs.
In light of continued elevated medical cost pressure in the Health Care Benefits segment, the company also asked investors to no longer rely on CVS Health’s previous guidance provided on its second-quarter 2024 earnings call.
The Zacks Consensus Estimate for CVS’ Health Care Benefits arm revenues is pegged at $32.13 billion for the third quarter of 2024.
Health Services
During the company’s third-quarter preliminary outlook announcement, CVS Health noted that its other segments performed consistent with prior projections for the third quarter.
In this line, in the to-be-reported quarter, the segment is expected to have faced pressure from the loss of a large client and continued pharmacy client price increases. However, these downsides are expected to have been offset by pharmacy drug mix, growth in specialty pharmacy and accretive contributions from the acquisitions of Oak Street Health and Signify Health. We expect CVS to have continued to promote the greater adoption of biosimilars and increase the affordability of these critical specialty drugs for its clients and their members. Cordavis is likely to have played a crucial role in reducing drug costs and ensuring a consistent supply of affordable, high-quality biosimilars for patients. All these trends are likely to have favored the company’s top line in the third quarter of 2024.
The Zacks Consensus Estimate for the Health Services arm’s revenues is pegged at $42.32 billion for the third quarter of 2024.
Pharmacy & Consumer Wellness
In the to-be-reported quarter, the segment’s performance is expected to have been driven by increased prescription volume and pharmacy drug mix. CVS may have continued to provide access to critical immunizations in the communities it serves and delivered on pharmacy performance measures for health plan partners. Both same-store sales and same-store prescription volumes are expected to have increased year over year in the third quarter of 2024, benefiting CVS’ top line.
We also expect the company to make notable progress with the new CVS CostVantage model, which promises greater transparency and simplicity and represents a significant shift from the traditional pharmacy reimbursement model.
However, continued pharmacy reimbursement pressure, the impact of recent generic introductions and lower front store volumes might have dented growth in the third quarter.
Meanwhile, the company is likely to have progressed in its store closure initiative, with plans to close 900 stores by the end of this year. The decrease in store count, along with the impact of recent generic introductions and continued reimbursement pressure, may have dented the segment’s growth rate in the to-be-reported quarter, thus affecting CVS’ operational performance.
The Zacks Consensus Estimate for the Pharmacy & Consumer Wellness segment is pegged at $30.93 billion for the third quarter of 2024.
What Our Model Suggests
Per our proven model, stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), along with a positive Earnings ESP, have a higher chance of beating estimates, which is not the case here:
Earnings ESP: CVS Health has an Earnings ESP of -12.28%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: The company currently carries a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 Rank stocks here.
CVS Shares Outperform Industry, Underperforms Sector and S&P
Year to date, shares of CVS Health have lost 28.1%. The stock has outperformed the Retail Pharmacies and Drug Store’s 35.1% dip. However, CVS shares underperformed the Zacks Retail sector’s increase of 20.2% and the S&P 500’s rise of 22.7%. The company's direct peers like Herbalife (HLF - Free Report) and Walgreens Boots Alliance (WBA - Free Report) registered a respective plunge of 54.3% and 64.2% in their stock prices during this period.
YTD Price Comparison of CVS
Image Source: Zacks Investment Research
Key Valuation Metric
From a valuation standpoint, CVS Health’s forward 12-month price-to-earnings (P/E) is 7.99X, a premium to the industry's average of 7.66X. The company is also trading at a significant premium to other industry players like Walgreens Boots, with its current P/E being 5.94, and Herbalife, whose current P/E is 7.7X. This suggests that investors may be paying a higher price relative to the company's expected earnings growth.
Image Source: Zacks Investment Research
Final Thoughts on CVS
CVS Health’s third-quarter 2024 earnings are likely to have been hit significantly by increased medical costs within the Health Care Benefits business. This apart, the entire retail pharmacy industry is currently grappling with continued pressure from non-reimbursable pharmacy expenses, which are pulling down mass demand for prescription as well as over-the-counter drugs and vaccinations. The company, along with its peers like Walgreens Boots and Herbalife, has been severely affected by this ongoing crisis. To tackle this issue, CVS Health has launched its store closure initiative, which is again denting the company’s revenues.
Meanwhile, no significant growth prospects until 2025 and a stretched valuation make the stock a risky bet. Accordingly, despite the recent dip in share prices, this might not be the ideal time to invest in CVS Health. In fact, those who already own this stock may consider selling it ahead of its earnings release, taking into account the company’s disappointing preliminary third-quarter 2024 outlook.