Rosa Pedraza
May 02, 2024 - 06:15

No Easy Remedy: CVS Stock Craters On Outsized Healthcare Costs

Investors alarmed as CVS Health's Medicare division struggles, leading to a steep decline in stock price. Is it a buying opportunity?

CVS Health Corp. (NYSE:CVS) is a diverse company that goes beyond just being a retail-pharmacy chain. With a health-insurance division offering Medicare Advantage plans, recent earnings results have caused concern among investors.

Contrarian investors typically see fear as an opportunity to buy low, but with CVS stock down 17% in a single day, even seasoned contrarians may question the company's ability to rebound in the healthcare sector.

CVS Health President and CEO Karen S. Lynch's statement in the first-quarter press release attempts to reassure investors, but the decline in the company's healthcare business is evident. Operating results in the Health Care Benefits segment saw a significant decline due to increased utilization in the Medicare business.

The numbers speak volumes, with a nearly 60% drop in adjusted operating income for the Care Benefits segment from the first quarter of 2023 to the first quarter of 2024. While revenue saw a modest increase year over year, falling short of analyst estimates and adjusted earnings per share also missed expectations.

Despite Lynch's confidence in addressing Medicare-related challenges, the company's revised full-year guidance paints a different picture. With a reduction in adjusted EPS outlook and cash flow projections, Wall Street analysts were taken aback by the magnitude of the cuts.

Looking at valuation, CVS appears reasonably priced compared to sector averages, with a low trailing P/E ratio and a healthy dividend yield. However, the uncertainty surrounding Medicare spending normalization leaves investors in a dilemma.

In conclusion, the decision to invest in CVS hinges on one's outlook on the healthcare sector. While the company has a history of beating earnings expectations, the recent performance raises concerns. Only those with a high tolerance for risk and a long-term investment horizon should consider CVS as an opportunity at this time.