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CVS·Why CVS’s Valuation Signals Opportunity
Just a brief update. CVS had a rough 2024, with its stock dropping nearly 45% due to political and business challenges. PBMs and Medicare Advantage (MA) plans came under heavy fire, with PBMs criticized for unclear pricing practices. At the same time, CVS’s Aetna insurance struggled as high healthcare usage and limited premium growth pushed its medical cost ratio to 92%, compared to UnitedHealth’s 85%. Leadership changes followed, with CVS replacing both its CEO Karen Lynch and Aetna’s CEO Brian Cane. The new CEO, David Joyner, is now focusing on fixing the Medicare Advantage business. Despite these setbacks, CVS’s retail pharmacy and PBM businesses stayed steady, and its free cash flow, while stretched, remains positive enough to maintain its dividend. Looking ahead, CVS seems undervalued and positioned for a turnaround. The stock trades at just 8-9x forward earnings, below its historical average of 10x. CVS is also making strategic moves, like expanding into primary care with its Oak Street Health acquisition and rolling out its TrueCost PBM initiative, both aimed at long-term growth in a growing healthcare market. While regulatory risks around PBMs persist, drastic changes like government takeovers or forced PBM divestitures seem unlikely. With its solid cash flow, diversified business, and new leadership, CVS is set to recover, presenting a strong opportunity for patient investors willing to look beyond the recent challenges.
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