CVS Health (CVS) Last Update 10/19/24
Related: BBY CL COST HD
% of Stock Price
Revenue
Gross Profits
Free Cash Flow
CVS Health
STOCK PRICE
DIVISION
% of STOCK PRICE
Health Services
31.9%
$38.36
Net Debt
44.9% $53.93
TOTAL
100%
$120.15
$66.21
Yours
Trefis Price
N/A
$55.33
Market
 
Top Drivers for Period
Key Drivers
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TREFIS Analysis


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RECENT NEWS AND ANALYSIS

Potential upside & downside to trefis price

CVS Health Company

VALUATION HIGHLIGHTS

  1. Health Care Benefits constitute 35% of the Trefis price estimate for CVS Health's stock.
  2. Pharmacy & Consumer constitutes 33% of the Trefis price estimate for CVS Health's stock.
  3. Health Services constitute 32% of the Trefis price estimate for CVS Health's stock.

WHAT HAS CHANGED?

  1. CVS Stock Performance

CVS stock has seen little change, moving slightly from levels of $60 in early January 2021 to around $58 in late-September 2024, vs. an increase of about 50% for the S&P 500 over this period.

Overall, 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 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.

  1. Q2 2024 Performance

CVS Health posted Q2 results with revenues of $91.2 billion, up 2.6% y-o-y, led by growth in Health Care Benefits and Pharmacy & Consumer Wellness segments, while Health Services revenue declined. The company's adjusted EPS of $1.83 was down 17% from $2.21 in the prior-year quarter. Looking forward, the company expects 2024 full-year EPS to be between $6.40 and $6.65.

  1. Impact of Elective Surgeries

CVS Health saw an increase in government-sponsored healthcare plan enrollments amid higher unemployment during the pandemic. Additionally, given the healthcare institutions' focus on Covid-19 and other emergency treatments, several types of elective surgeries were postponed in 2020, resulting in a lower MBR ratio (Benefit Costs as % of Premium Revenue) declining to 81% in 2020, compared to 84% in 2019. This also aided the company's 2020 earnings, which grew 6% to $7.50 per share on an adjusted basis, compared to $7.08 in 2019. However, 2021 marked recovery, and its vaccine administration helped its earnings rise 12% to $8.40. MBR stood at 84% in 2022, and its adjusted earnings per share grew 3% to $8.69. With more elective surgeries being performed lately, CVS' MBR increased to 86.2% in 2023.

  1. Aetna Acquisition
The Company acquired 100% of the outstanding shares and voting interests of Aetna for a combination of cash and stock in November 2018. Under the terms of the merger agreement, Aetna shareholders received $145 in cash and 0.8378 CVS Health shares for each Aetna share. The transaction valued Aetna at approximately $212 per share, or approximately $70 billion. Including the assumption of Aetna's debt, the total value of the transaction was approximately $78 billion. The Company financed the cash portion of the purchase price through a combination of cash on hand and by issuing approximately $45 billion of new debt, including senior notes and term loans. Aetna is a health care benefits company that offers traditional, voluntary, and consumer-directed health insurance products and related services. The acquisition of Aetna should improve the consumer health care experience for the company as they will combine Aetna's health care benefits products and services with CVS Health's more than 7,500 retail locations, and integrated pharmacy capabilities.

  1. CVS And Its Several Partnerships To Improve Its Performance

The company has undertaken certain steps to ensure a better growth trajectory in the future. It is focusing on partnering with all payers to boost volumes and capture market share. A partnership with Cigna Health Works was announced in 2017. It has also partnered with Express Scripts' Diabetes Care Value program to be its retail network option. The company is in talks with many such PBM health plans to expand the reach of its network.

CVS Health made another big deal that has helped it grow its business significantly. Completed in 2018, the $70 billion acquisition of Aetna by CVS has provided a major boost to CVS's business. The combination has provided consumers with a more integrated experience, reduced costs, and improved access to healthcare. This will combine CVS's dense local presence through pharmacies and clinics with Aetna's health care benefits and services.

CVS's PBM business has gotten greater negotiating power with drug companies. The company has tapped into Aetna's 40 million user base and provides them with its other offerings, which include pharmacy benefit management.

In March 2023, CVS completed its planned acquisition of Signify Health, a home healthcare services provider, in an $8 billion deal. In May 2023, it acquired Oak Street Health for $10.6 billion.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Health Services

Health Services EBITDA Margin: We currently forecast CVS Health's EBITDA margin for Health Services to rise from 4.9% in 2023 to 5.4% by the end of our review period. There could be a 25% upside to the Trefis price estimate if margins improve to 8% by the end of our forecast period.

Health Care Benefits

Health Care Benefits EBITDA Margin: We currently forecast EBITDA margins for Health Care Benefits to rise from 7.6% in 2023 to about 7.9% by the end of our review period. There could be an upside of over 20% to the Trefis price estimate if margins were to increase to over 10% over our review period. On the other hand, there will be a similar downside if margins come under pressure due to the acquisition of new contracts and other contract renewals.

BUSINESS SUMMARY

CVS Health (NYSE: CVS) is the largest pharmacy services provider in the US, comprising the largest network of retail pharmacy stores nationwide along with pharmacy services such as mail-order pharmacy services, prescription plan management, and claims processing. CVS fills and manages over 2 billion prescriptions per year through its businesses.

Currently, CVS operates over 7,500 Pharmacy stores. The retail business provides health care services through more than 1,000 retail health clinics, which are mostly located inside CVS pharmacies and serve to diagnose and treat minor health issues. The retail pharmacy business also includes an online pharmacy, CVS.com.

CVS retail stores sell prescription drugs and a wide assortment of general merchandise, including over-the-counter (OTC) drugs, beauty products, cosmetics, photo finishing, seasonal merchandise, greeting cards, and convenience foods.

As a pharmacy benefits manager, CVS Health manages the dispensing of pharmaceuticals through its fully automated mail-order pharmacies and national network of approximately thousands of retail pharmacies to eligible members in the benefit plans maintained by its clients. It utilizes proprietary information systems to perform safety checks, drug interaction screenings, and brand-to-generic substitutions.

SOURCES OF VALUE

Health Care Benefits, Health Services, and Pharmacy & Consumer Wellness are major sources of value for CVS Health, each accounting for a little over 30% of CVS' total value

KEY TRENDS

Increasing demand and utilization of prescription drugs in the U.S.

An aging population combined with the fact that older people contribute to a larger proportion of expenditures on drugs will lead to an increase in the prescription drugs market size.

Looking at demographics, the number of people in the United States who are 65 or older was roughly 62 million in 2023 and the figure is expected to grow to 80 million in 2040. This age group fills an average with more than 25 prescriptions per person annually, 30% more than people between the ages of 55 and 64. That will increase utilization dramatically for years to come and will help drive the growth of both — PBM and retail businesses.

Accelerating sales of generic drugs and private label goods to positively impact gross profit margins of retail stores.

Generic drugs offer a higher gross margin compared to branded drugs. The total generic dispensing rate, which factors the percentage of generic drugs in a consumer's prescription, grew to around 88% in 2023, compared to 81% ten years ago. Generic drugs continue to replace branded drugs, albeit at a slower pace. With the expansion of generic drug sales in the U.S. (even if the pace is expected to slow down), the company may have room for growth in EBIT margins.

Private labels have grown increasingly popular among US consumers, as they offer the same quality as established brands and are priced lower. This offers customers value while providing CVS with significantly higher margins.