CVS Health (CVS, Financial) experienced a significant downturn, with shares dropping to levels last seen in March 2020. This follows a troubling Q1 report where the company significantly lowered its FY24 adjusted EPS forecast by $1.30 to a minimum of $7.00. The primary issue was higher-than-expected cost pressures in Medicare Advantage (MA), impacting its Health Care Benefits segment. This led to CVS missing its Q1 earnings targets and revising its FY24 EPS outlook downwards.
Initially, CVS's FY24 earnings guidance was set below analyst expectations, assuming normalized MA trends. However, Q1 revealed that these trends were substantially higher than anticipated. The utilization pressure was widespread, affecting outpatient services and supplemental benefits, which exceeded initial projections. Despite these challenges, CVS noted some seasonal moderation in inpatient admissions as of April.
The quarter ended with CVS posting a significant earnings miss, its first in over five years, with adjusted EPS dropping 40.5% year-over-year to $1.31. Revenue growth was modest at 3.7% year-over-year, reaching $88.44 billion, affected by a 9.7% decline in the Health Services segment due to the loss of a major customer. Although the Pharmacy & Consumer Wellness segment saw a 2.9% increase in sales, overall front store volume continued to decline, indicating ongoing inflationary pressures on consumers.
In response, CVS is pushing forward with its enterprise productivity initiatives to streamline operations and align costs with the current economic landscape. The company has also announced plans to close over 900 stores this year as part of its cost reduction strategy and has completed a $3.0 billion accelerated share repurchase plan, with no plans for further share repurchases this year.
Investors remain skeptical about CVS's near-term prospects, as the company faces rising costs—evidenced by a 210 basis point increase in its FY24 medical benefit ratio forecast to 89.8%—and persistent elevated utilization trends. With the stock already on a downward trend prior to the Q1 report and mounting concerns over escalating costs, the outlook remains bleak. Investors are likely to remain cautious, waiting for tangible signs of improvement before re-engaging with the stock.
