Will CVS Health Stock Recover?

It’s been a treacherous journey for CVS Health Corporation (NYSE:CVS) shareholders with the stock down 28% over the past 12 months. Sluggish growth has hit its stock hard, and the company is still coping with its effects. Nonetheless the new year has started with a bang and CVS share price bolted out of the gates to rise by more than 17% before the close of the first month of the year.

To put the dismal share price performance into perspective over the past year or so, the broader SPDR S&P 500 ETF Trust (NYSEARCA:SPY) gained more than 25% over the same period so the relative underperformance has been quite stark. So, the looming question now remains, can CVS stock sustain its bounce back?

CVS Health Has Enormous Reach

CVS Health has an extensive footprint in the U.S. and, as of the third quarter last year, had more than 9,000 retail locations, 900+ walk-in medical clinics, and more than 225 primary care medical clinics under its corporate umbrella.

The company is also one of the largest pharmacy benefits managers in the country with about 90 million plan members and a dedicated senior pharmacy care business serving more than 800,000 patients a year (more on its PBM segment later).

Despite its enormous reach, CVS has been sledding uphill due to mounting pressures from increased medical costs. By the middle of last year, CVS Health announced a cost-cutting plan to chop $2 billion in expenses over several years.

A primary reason for the elimination of expenses stems from the fact that CVS is also a leading health insurance provider via its Aetna business.

The insurance arm includes plans by Aetna for the Affordable Care Act, Medicare Advantage, and Medicaid, as well as for dental and vision-related issues. This segment’s Medicare Advantage star ratings help Medicare patients compare the quality of Medicare health plans.

Troubles for CVS Health have come in the form of margin pressures. Speculation was rife that the company would break up into independent businesses to ignite a financial turnaround plan. The option being weighed was to split up the retail pharmacy and insurance units.

This would have been a huge upheaval for a company that has spent years and billions of dollars to turn itself into a healthcare conglomerate but the rumors did not materialize, at least not yet.

Instead, CVS underwent a leadership change, handing its reigns to David Joyner as President and Chief Executive Officer to pull it out of the woods, so to speak. So far, CVS Health remains a big-budget one-stop destination for healthcare needs.

Another fly in the ointment, so to speak, is that CVS Health is also facing pressure from the U.S. Federal Trade Commission regarding its PBM business.

The FTC claimed that the nation’s three largest PBMs, including CVS Health’s CVS Caremark, marked up prices at their pharmacies between 2017 and 2022, netting them $7.3 billion in revenue in excess of the acquisition costs of the drugs.

The regulatory body had already sued the PBMs back in September when it accused them of nudging patients towards higher-priced insulin products.

Will CVS Health Turnaround Successfully?

While sluggish growth might be expected, the company’s bottom line has shown weakness due to the pressure of medical costs.

In its third quarterly results for fiscal 2024, management reported a 6% increase from the prior year’s period in its top line to $95.43 billion. The growth rate is actually not that bad as the law of large numbers tends to prove ever more difficult to overcome at the multi-billion dollar market cap level.

On the other hand, its bottom-line growth has keeled under the pressure from costs, posting $2.55 billion in adjusted operating income, a 43% drop from the year-ago value. The Health Care Benefits segment recorded the use of deficiency reserves to the tune of about $1.1 billion in anticipation of the losses in Q4 2024 within the Medicare product line.

The Medicaid business continues to be tough sledding, and if anything, it appears that CVS doesn’t have a demand problem so much as it has a supply one.

Adding to the woes, management has refused to give an outlook for the fiscal year 2024. So, it seems like there’s a long way to go before CVS Health comes fully out of the woods unscathed. But, if there’s one company that can do it, it might well be CVS because of its longstanding history of navigating cycles and challenges like these.

On the bright side, CVS’ selloff has made the stock cheaper and now sits at 9.95x its forward non-GAAP earnings, well below the equivalent metric of rival firms.

It probably makes a lot of sense for bargain hunters to consider CVS Health now but the company is unlikely to reward them quickly unless management handles the cost headwinds better and faster than most expect.