It’s been a year to forget for the healthcare company.
CVS Health (CVS -1.52%) isn’t having a good year. It is facing multiple headwinds and slow revenue growth, and investors are reacting in kind. The company’s shares are down by 26% since January.
CVS Health’s issues didn’t start in 2024, though, and that’s the problem for the healthcare giant. It’s much harder to ignore more than two years of poor performance. What exactly is going on with CVS Health? Can the company bounce back and still deliver solid returns over the long run?
Let’s try to answer these questions.
CVS data by YCharts.
CVS Health’s guidance revisions
CVS Health’s problems may have begun once the pandemic started to recede. The company’s sales of COVID-19 diagnostic test kits, among its most popular items in the early days of the outbreak, suddenly fell off a cliff. It has faced another, arguably more significant problem within its Medicare Advantage (MA) business. CVS Health’s enrollment and utilization within this unit have soared, contributing to strong revenue growth within its healthcare benefits segment.
In the second quarter, healthcare benefits revenue grew 21.4% year over year to $32.5 billion. Note that CVS Health’s overall revenue was only up 2.6% year over year to $91.2 billion. However, CVS Health is struggling to contain costs within its MA business. So, while it is helping pull revenue growth in the right direction and helping offset sales declines elsewhere, it’s not helping the company’s margins and bottom line much. In Q2, CVS Health’s adjusted earnings per share (EPS) totaled $1.83, down from the $2.21 it reported in the year-ago period.
Furthermore, CVS Health announced that it was revising its guidance downward. It now expects adjusted EPS of between $6.40 and $6.65 for the year, down from at least $7. This isn’t new. CVS Health has modified its guidance several times in recent quarters. That’s a bad sign that points to significant uncertainty within the company’s business. The market does not like uncertainty. So, even beyond CVS Health’s poor financial results, the guidance cuts are contributing to the terrible stock market performance the healthcare giant has posted in recent years.
Is there a way back from this ordeal?
Looking beyond the headwinds
CVS Health will have to make changes to its MA business to get back in the good graces of investors. The company is planning to do just that starting next year. CVS Health’s CFO, Thomas Cowhey, said as much during an investment conference in May. He also warned that the company’s efforts could result in the loss of as much as 10% of its MA patients, but from here on out, the company is promising to prioritize margins over the number of members it has.
We don’t know all the details of what CVS Health plans to do, nor whether the company’s strategy will work. But it seems it will continue to struggle with this issue for a little longer. Investors will have to balance that against CVS Health’s strengths, which include a business that spans much of the healthcare journey for patients, from primary care and insurance to drugs. CVS Health is even developing medicines instead of just selling them now although, to be clear, its new subsidiary Cordavis will focus on biosimilars.
The biosimilar market is ruthlessly competitive. It is hard to build a moat. Once patent exclusivity expires, anyone is free to make knock-offs. It’s hard to have pricing power in such an environment. However, CVS Health has the advantage of a large pool of existing customers who already know and trust its brand and are already using some of its products or services in their care journey.
The bigger point is that thanks to its solid position in the healthcare industry, CVS Health can still deliver excellent results and returns over the long run — if it can get around its current issues related to its MA business. That’s especially the case since the demand for healthcare services will only increase as the world’s population ages. It is also an industry that can perform relatively well in good and bad economic times.
That’s why, in my view, for investors looking beyond the next five years, it is still worth it to consider investing in CVS Health. The business won’t recover overnight, but it remains ideally positioned to benefit from important long-term trends.