Advancing Integrated Capabilities Will Make Healthcare More Affordable And Accessible

Key Takeaways

• Recovery in Aetna and advancements in integrated capabilities are expected to boost margins and earnings.
  
• Investments in digital strategies and biosimilar markets could enhance revenue growth and net margins.
  
• Rising healthcare costs, anticipated declines in membership, and evolving pricing models may pressure CVS Health's margins and impact revenue and earnings.

Catalysts

Provides health solutions in the United States.

• CVS Health is expecting meaningful recovery in its Aetna business, particularly in Medicare Advantage, which should improve margins and boost earnings.
  
• The company is advancing integrated capabilities to make healthcare more affordable and accessible, which is likely to drive revenue growth.
  
• CVS Health is investing in digital strategies and emerging technologies to enhance consumer experiences and improve efficiency, potentially increasing net margins.
  
• They are strengthening their balance sheet and are committed to being disciplined stewards of capital, which could improve earnings through cost efficiencies.
  
• CVS Health is expanding its reach with biosimilar markets and new pricing models like TrueCost and CostVantage, which could improve revenue and margins by lowering costs for consumers.

CVS Health Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CVS Health's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.2% today to 1.9% in 3 years time.
• Analysts expect earnings to reach $8.2 billion (and earnings per share of $6.15) by about March 2028, up from $4.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $10.7 billion in earnings, and the most bearish expecting $7.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.9x on those 2028 earnings, down from 18.1x today. This future PE is lower than the current PE for the US Healthcare industry at 24.9x.
• Analysts expect the number of shares outstanding to grow by 0.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.21%, as per the Simply Wall St company report.

CVS Health Future Earnings Per Share Growth

Risks

• CVS Health is facing challenges with rising healthcare costs, including increased provider costs and dramatic price hikes for branded pharmaceuticals, which could pressure net margins.
  
• The company anticipates a decline in membership for Medicare Advantage and Individual Exchange products, reducing their coverage base and potentially impacting revenue.
  
• CVS Health's guidance reflects a significant operating loss in the Aetna segment due to higher medical benefit ratios driven by elevated medical cost trends, posing a risk to earnings.
  
• The transition to new pricing models such as CVS CostVantage and Caremark's TrueCost may initially create pressure on margins in the Pharmacy & Consumer Wellness segment.
  
• The company's future outlook includes a slowing of operating cash flow due to late-year timing items pulled forward, affecting liquidity and potentially constraining capital deployment strategies.

Valuation

• The analysts have a consensus price target of $72.458 for CVS Health based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $91.43, and the most bearish reporting a price target of just $48.01.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $431.0 billion, earnings will come to $8.2 billion, and it would be trading on a PE ratio of 13.9x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of $66.33, the analyst price target of $72.46 is 8.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.