CVS - CVS Health: Lower Guidance But Risk/Reward Remains Attractive

2024-02-15 06:25:36 ET

Summary

• CVS reported mixed Q4 and FY23 earnings, exceeding the top line but missing margins on the back of elevated medical costs, with Q4 MLR at 88.5%.
• Despite the cost pressure in insurance, pricing measured by $/member growth has shown continued strong results ahead of peers at ~11.5% YoY, with total premia up 17%.
• Member growth has also continued to perform well, with total members up 5.3% and Medicare Advantage plans reaching a record 13.5% share of government members.
• I lower my price target by 9% to $91 on lower FY24 margin estimates and a slight downward revision in the ex-pharmacy target multiple but remain overweight (~18% upside).

I started my coverage of CVS Health Corp ( CVS ) in December following the company's investor day, which aimed to lay out management's ambitious plan to continue to transformation of the once brick-and-mortar pharmacy operator to a holistic healthcare provider. In the note I laid out my thesis of CVS being a strong value investment thesis driven by industry-leading performance in its insurance division Aetna and significant undervaluation compared to peers. Since then, CVS has performed slightly above peers,...

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