CVS Health's Pre-Q4 Earnings: Time to Buy, Hold or Sell the Stock?

CVS Health Corporation CVS is scheduled to report fourth-quarter 2024 results on Feb. 12, before the opening bell.See the Zacks Earnings Calendar to stay ahead of market-making news.In the last reported quarter, the company’s adjusted earnings of $1.09 exceeded the Zacks Consensus Estimate by 1.87%. CVS Health beat estimates in three of the trailing four quarters and missed in one, the average negative surprise being 2.50%.CVS Health Corporation Price and EPS Surprise CVS Health Corporation price-eps-surprise | CVS Health Corporation QuoteThe Zacks Consensus Estimate for fourth-quarter revenues is pegged at $97.06 billion, suggesting growth of 3.5% year over year. The consensus estimate for fourth-quarter earnings is pegged at 89 cents per share, implying a 58% decline on a year-over-year basis.Q4 Estimates for CVS Down 13 Cents in a MonthEarnings estimates for CVS Health have plunged from $1.02 per share to 89 cents for the fourth quarter over the past 30 days.Image Source: Zacks Investment ResearchEstimates have been southbound for this drugstore chain and pharmacy benefits manager over the past couple of months, mostly affected by its strategic restructuring plans aimed at addressing financial challenges. To address mounting financial pressure, CVS is reportedly considering a strategic restructuring that involves reducing costs by $2 billion, which could result in 2,900 job cuts. CVS is also progressing with a plan to close 900 stores over three years, a decision influenced by shifting consumer shopping behaviors and demographic trends.Let’s look at how things have shaped up for CVS Health before the announcement.Factors to Focus on Ahead of CVS' Q4 EarningsRestructuring Charges to Put Pressure on Q4 Bottom Line: During the third quarter of 2024, the company finalized an enterprise-wide restructuring plan intended to streamline and simplify the organization, improve efficiency and reduce costs. In the quarter itself, the company incurred $1.17 billion in restructuring charges, which included a store impairment charge, corporate workforce optimization costs, including severance and employee-related costs and other asset impairment and related charges associated with the discontinuation of certain non-core assets.Given that the restructuring plan is described as enterprise-wide and ongoing, it is reasonable to expect similar charges in the fourth quarter. This might have been a drag on fourth-quarter earnings.High Utilization Might Hurt CVS' Q4 Profitability: The persistently elevated utilization of medical services is putting significant pressure on CVS Health’s Health Care Benefits segment. The trend has been observed since early last year when the division experienced a higher than previously expected medical cost trend in Medicare Advantage due to increased outpatient and supplemental benefit utilization compared with pandemic-influenced utilization levels in the prior year. On top of that, CVS Health recorded a premium deficiency reserve of $766 million in the third quarter due to a premium deficiency in its Medicare product line related to the 2024 coverage year. This continued elevated utilization may have led to record additional premium deficiency reserves in the segment in the fourth quarter of 2024.Escalating Medical Benefit Ratio a Cause of Concern: In recent quarters, CVS Health’s Medicaid business has been experiencing medical cost pressure from higher-than-expected acuity following the resumption of member redeterminations. During the third quarter, the medical benefit ratio (MBR) of 95.2% increased 950 basis points year over year.  A higher MBR typically indicates that the company paid out more in benefits than collected more in premiums, resulting in lower profitability. CVS Health also witnessed unfavorable development of 2024 medical costs related to second-quarter dates of service, which adversely impacted its trend outlook for the rest of 2024.We expect the company to once again report medical cost pressure in the fourth quarter in the Health Care Benefits segment, resulting in shrinking profitability.  The Zacks Consensus Estimate for CVS’ Health Care Benefits arm revenues is pegged at $32.92 billion for the fourth quarter of 2024.Health Services to Benefit from Favorable Trends, Acquisitions: In the to-be-reported quarter, the segment is expected to have benefited from pharmacy drug mix, growth in specialty pharmacy and accretive contributions from the acquisitions of Oak Street Health and Signify Health. We expect CVS to have continued promoting the adoption of biosimilars and increase the affordability of these critical specialty drugs for its clients and their members. Meanwhile, the success of Cordavis highlights CVS Health’s innovative approach to the biosimilar opportunity, driving differential savings for pharmacy benefit management (PBM) customers. Cordavis is likely to have played a crucial role in reducing drug costs and ensuring a consistent supply of affordable, high-quality biosimilars for patients. All these trends are likely to have favored the company’s top line in the fourth quarter of 2024.The Zacks Consensus Estimate for the Health Services arm’s revenues is pegged at $44.42 billion for the fourth quarter of 2024.Pharmacy & Consumer Wellness: In the to-be-reported quarter, despite the challenging consumer backdrop, the segment’s performance is expected to have been driven by increased prescription volume and pharmacy drug mix. CVS is likely to have provided access to critical immunizations in the communities it serves and delivered on pharmacy performance measures for health plan partners. Both same-store sales and same-store prescription volumes are expected to have increased year over year in the fourth quarter of 2024, benefiting CVS’ top line.We also expect the company to have made notable progress with the CVS CostVantage model, which promises greater transparency and simplicity and represents a significant shift from the traditional pharmacy reimbursement model.However, continued pharmacy reimbursement pressure, the impact of recent generic introductions and lower front store volumes might have dented growth in the fourth quarter.The company is likely to have progressed in its store closure initiative. On the third-quarter earnings call, CVS Health noted that by the end of November, it will conclude its three-year store optimization initiative, which targeted the closure of 900 stores.This may have dented the segment’s growth rate in the to-be-reported quarter, thus affecting CVS’ operational performance.The Zacks Consensus Estimate for the Pharmacy & Consumer Wellness segment is pegged at $33.27 billion for the fourth quarter of 2024.CVS Shares Outperform Industry, Underperform Sector and S&PIn the past year, shares of CVS Health have lost 18.5%. The stock has outperformed the Retail Pharmacies and Drug Store industry’s 24.7% dip. However, CVS shares underperformed the Zacks Retail sector’s increase of 33% and the S&P 500’s rise of 25.5%. The company's direct peers like Herbalife HLF and Walgreens Boots Alliance WBA registered a respective plunge of 49.9% and 51.6% in their stock prices during this period.One-Year Price Comparison of CVSImage Source: Zacks Investment ResearchExpensive ValuationFrom a valuation standpoint, CVS Health’s forward 12-month price-to-earnings (P/E) is 9.45X, a premium to the industry's average of 8.89X. The company is also trading at a significant premium to Walgreens Boots, with its current P/E being 6.69, and Herbalife, whose current P/E is 3.21X. This suggests that investors may be paying a higher price relative to the company's expected earnings growth.Image Source: Zacks Investment ResearchFinal Thoughts on CVSCVS Health’s fourth-quarter 2024 earnings are likely to have been hit significantly by increased medical costs within the Health Care Benefits business. Apart from this, the entire retail pharmacy industry is currently grappling with continued pressure from non-reimbursable pharmacy expenses, which is pulling down mass demand for prescription as well as over-the-counter drugs and vaccinations. The company, along with its peers like Walgreens Boots and Herbalife, has been severely affected by this ongoing crisis. To tackle this issue, CVS Health has launched its store closure initiative, which has been denting the company’s revenues.Moreover, the lack of significant growth prospects until 2025 and a stretched valuation make this Zacks Rank #5 (Strong Sell) stock a risky bet. Accordingly, despite the recent dip in share prices, this might not be the ideal time to invest in CVS Health.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.Only $1 to See All Zacks' Buys and SellsWe're not kidding.Several years ago, we shocked our members by offering them 30-day access to all our picks for the total sum of only $1. 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