CVS Health: Earnings Beat Ignites Stock Rally

Key Points

• CVS Health's revenue growth and earnings beat analyst predictions, indicating a strong performance in key business segments.
• CVS Health's forward-looking guidance suggests a positive earnings rebound for the coming year, signaling confidence in its strategic initiatives and market position.
• Strategic initiatives are positioning CVS Health for sustained growth and improved customer engagement.

 

Shares of CVS Health Corporation NYSE: CVS experienced a jolt, rising over 15% on February 12, 2025, as the market responded to the release of its fourth-quarter 2024 earnings report. CVS Health's stock price increase comes after a period of decline, causing investors to question whether this is a temporary upswing or a sign of a genuine turnaround.

Given the company's history of struggling to implement its strategy, investors want to know if the recent positive earnings report is an indication of a sustainable turnaround or if it is just another temporary improvement.

Earnings Unpacked: CVS Health's Q4 Performance

CVS Health's earnings report for the fourth quarter of 2024 was mixed. On the revenue front, the report delivered positive news, with total revenue reaching $97.71 billion. This rise marked a 4.2% increase compared to the same period last year and slightly exceeded CVS Health’s analyst expectations, which hovered around $97 billion. 

While adjusted earnings per share (EPS) of $1.19 surpassed consensus estimates, it represented a decrease from the $2.12 reported in the fourth quarter of 2023. Similarly, GAAP net income declined to $1.64 billion, down from $2.05 billion year over year, and operating income saw a substantial decrease of 29.8%, landing at $2.4 billion compared to $3.4 billion in the prior year. Examining performance at the segment level can help us better understand these losses.

The Pharmacy & Consumer Wellness segment demonstrated revenue strength, growing 7.5% to $33.5 billion. Increased prescription volumes and a favorable drug mix propelled this growth. Despite this revenue expansion, adjusted operating income in this segment decreased 13.3%, settling at $1.76 billion. This contraction in operating income suggests pressures on margins, possibly stemming from pharmacy reimbursement challenges and decreased front-store sales.

In contrast, the Health Care Benefits segment faced a downturn, swinging to an adjusted operating loss of $439 million, compared to a $676 million profit in the same period last year. This segment's poor performance was highlighted by a surge in the Medical Benefit Ratio (MBR) to 94.8% from 88.5%. The MBR is a key profitability metric for insurance businesses, and this change indicates the proportion of premium revenue consumed by healthcare claims. A higher MBR signifies escalating healthcare costs relative to premium income, thereby compressing profit margins. In essence, CVS's insurance unit spent nearly 95 cents on medical claims for every dollar of premium revenue in Q4 2024, a significant increase from the 88 cents spent in the previous year.

The Health Services segment, which handles pharmacy benefit management and related services, exhibited relative stability. Adjusted operating income for this segment reached $1.76 billion, experiencing a modest 5.3% decrease year over year. This suggests resilience in the PBM and related service offerings, partially offsetting the struggles within the insurance division. Overall, the company’s gross margin stood at 14.25%, reflecting the blended profitability across its diverse operations.

2025 Forecast: Whispers of a Profit Rebound?

CVS Health's forward-looking guidance for 2025 offers a glimpse into management's expectations and potential recovery pathways. The company projects adjusted EPS for the full year 2025 to fall within the range of $5.75 to $6.00. This forecast is crucial as it suggests an anticipated rebound in earnings compared to the $5.42 adjusted EPS reported for 2024. However, it is worth noting that even the upper end of this guidance remains below the $8.74 adjusted EPS achieved in 2023, indicating a multi-year recovery trajectory. GAAP diluted EPS for 2025 is guided to a range of $4.58 to $4.83.

CVS Health anticipates generating approximately $6.5 billion in cash flow from operations in 2025. This projection is lower than the $9.1 billion generated in 2024. The decreased cash flow guidance likely reflects the impact of ongoing restructuring initiatives and strategic investments aimed at long-term growth. While the midpoint of CVS Health's adjusted EPS guidance is slightly below the pre-earnings analyst consensus of approximately $5.97, the overall tone of the guidance is perceived as positive, signaling an expectation of earnings improvement. This projected earnings recovery, even if gradual, appears to be a key driver behind the market's favorable reaction and the subsequent stock price increase.

The Unfinished Chapter for CVS Health

Despite the positive momentum generated by the Q4 earnings report and optimistic guidance, it is crucial to acknowledge that CVS Health is not entirely out of the woods. Significant challenges persist, particularly within the Health Care Benefits segment. The elevated Medical Benefit Ratio remains a concern, indicating ongoing pressure from healthcare sector expenses and potentially impacting profitability in the insurance division. Furthermore, the unfavorable Medicare Advantage star ratings continue to present a headwind, affecting reimbursement rates and plan attractiveness.

CVS Health's diverse operations encounter unique competitive and regulatory challenges within each segment. Additionally, the company's substantial debt burden will require continued investor monitoring. Consequently, despite the optimism generated by the recent earnings report, a genuine and enduring turnaround for CVS Health hinges on effectively addressing these persistent challenges and skillfully implementing its strategic initiatives.

The Earnings Beat Is Just the First Dose

CVS Health's recent earnings report offers investors a blend of encouragement and caution. The company demonstrated resilience in its pharmacy and consumer-facing segments, and its forward guidance hints at a potential earnings recovery. However, the persistent headwinds within its health insurance arm cannot be ignored. Whether this earnings beat marks the definitive start of a turnaround or merely a reprieve remains to be seen. 

For investors, the key takeaway is watchful optimism. CVS Health's strategic initiatives and projected recovery warrant attention. Still, sustained improvement, particularly within its challenged insurance segment, will ultimately determine whether this healthcare giant can truly reclaim its footing and deliver long-term value. The coming quarters will be critical in confirming whether this surge is the beginning of a new chapter or just an upward tick in an ongoing narrative of transformation.