ELV - CVS Health: Show-Me Story Is Dead For The Near Term
2024-05-05 04:35:03 ET
Summary
- With CVS having reported terrible Q1 earnings and cutting FY24 EPS guidance by ~20%, I view management's credibility in executing its "show-me" story as highly challenged.
- Being the first quarterly EPS miss in years and at that scope (~22% below consensus), I also cast significant doubt on management's communication to capital markets and investors.
- 580bps YoY surge in MLR cut insurance margins to ~2.3%, down 470bps YoY and depressing corporate-level margins to 3.3% (-180bps YoY).
- With peers reporting a quarterly drop in MLR and providing positive full year guidance, I see weak profitability turning from an industry problem to a CVS specific one.
- I cut my price target by 29% to $65/sh and move shares to Underweight on lower estimates and a downward adjusted target multiple to represent MLR challenges and higher debt.
Yesterday, May 1st CVS Health ( CVS ) reported its earnings for Q1 of 2024, largely meeting revenue estimates but significantly missing (~22%) on EPS due to severe profitability challenges in its insurance division amid a further growing Medical Loss Ratio ("MLR"). Since my first note on the company, I regarded CVS a "show-me" story with significant execution risk but a favorable risk/reward based on the potential I saw in management's vision....
CVS Health: Show-Me Story Is Dead For The Near Term