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Here's Why Investors Should Retain CVS Health (CVS) For Now

CVS Health Corporation CVS has been registering solid performances across all three operating segments. High pharmacy claims volume, specialty pharmacy growth and brand inflation aided Pharmacy Services arm. Growth in the Retail segment can be mainly attributed to increased prescription and front store volume. However, weak margins and stiff competition do not bode well.

In the past year, the Zacks Rank #3 (Hold) stock has gained 12.4% compared with 0.5% growth of the industry and a 9.2% fall of the S&P 500.

The renowned pharmacy innovation company has a market capitalization of $123.95 billion. The company’s long-term projected growth rate of 7.6% compares with the industry’s growth projection of 6.3% and the S&P 500’s estimated 11.4% increase. The company beat earnings estimates in the trailing four quarters, the average surprise being 8.2%.

Zacks Investment Research
Zacks Investment Research


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Let’s delve deeper.

Factors At Play

Health Care Benefit Shows Potential: CVS Health’s Health Care Benefits segment delivered strong revenue growth, banking on membership growth across all product lines. In the first quarter, the company saw membership growth of more than 670,000 sequentially. The Medicare franchise continued to benefit the segment as Medicare Advantage grew by about 200,000 members sequentially. The company recorded a medical benefit ratio of 83.5% within the commercial business, indicating continued progression toward normalized total medical costs.

Also, the company is benefiting from the broad and unique portfolio of assets with the first CVS-Aetna co-branded offerings.

Pharmacy Services Business Gaining Traction: We are encouraged by CVS Health’s robust revenue performance within Pharmacy Services on increased pharmacy claims volume, specialty pharmacy growth and brand inflation. During the first quarter, total pharmacy claims processed rose 5.8% on a 30-day equivalent basis. This upside can be attributable to strong net new business, greater utilization, and a weaker cough, cold, and flu season in the prior year.

CVS Health also maintained an impressive 98% core client retention by the end of the quarter under review. The company expects to return to its historical retention levels in future periods.

Retail on a Growth Track: The Retail/Long Term Care (LTC) segment plays a crucial role in the CVS Health’s community-focused strategy. In the first quarter, this business witnessed 9.2% growth year over year on increased prescription and front store volume. Prescriptions filled increased 5.1% on a 30-day equivalent basis compared to the year-ago period. The company also administered more than 6 million COVID tests and over 8 million COVID vaccines nationwide in the reported quarter.

CVS Health is currently optimizing the retail portfolio, which will consist of three models: advanced primary care clinics, enhanced health hub locations and traditional CVS pharmacy locations.

Downsides

Weak Margin Scenario: During the first quarter, CVS Health’s gross margin contracted 69 basis points (bps) to 17.4% on a 12.1% uptick in total cost (including Benefit Cost). Meanwhile, operating costs in the quarter rose 10.7% year over year, resulting in a 2.4% drop in operating profit, with a 63-bp contraction in operating margin to 4.5%.

Reimbursement Headwinds: The Pharmacy Services and Retail/LTC segments continue to be challenged by ongoing pharmacy reimbursement pressure. CVS Health is undertaking efforts to combat this reimbursement pressure by increasing volume and reducing costs.

Competitive Landscape: Intense competition and tough industry conditions are major impediments for CVS Health. Competition is especially tough in the pharmacy segment, as other retail businesses continue to add pharmacy departments and low-cost pharmacy options become available.

Estimate Trend

In the past 30 days, the Zacks Consensus Estimate for CVS Health’s 2022 earnings moved up to $8.34 by a penny.

The Zacks Consensus Estimate for 2022 revenues is pegged at $308.65 billion, suggesting a 5.7% rise from the 2021 reported number.

Other Key Picks

A few better-ranked stocks in the broader medical space that investors can consider are Alkermes plc ALKS, Novo Nordisk NVO and Masimo Corporation MASI.

Alkermes has an estimated long-term growth rate of 25.1%. Alkermes’ earnings surpassed estimates in the trailing four quarters, the average surprise being 350.5%. It currently carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Alkermes has outperformed the industry in the past year. ALKS has gained 20.7% against the industry’s 40.3% decline in the said period.

Novo Nordisk has a long-term earnings growth rate of 14.5%. The company surpassed earnings estimates in the trailing four quarters, delivering a surprise of 7.6%, on average. It currently flaunts a Zacks Rank #2 (Buy).

Novo Nordisk has outperformed its industry in the past year. NVO has gained 34.6% against the industry’s 19% growth.

Masimo has a historical earnings growth rate of 15.1%. Masimo’s earnings surpassed estimates in the trailing four quarters, the average surprise being 4.4%. It currently carries a Zacks Rank #2.

Masimo has underperformed its industry in the past year. MASI has declined 44.2% compared with the industry’s 25.4% plunge.


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