Last Update 09 Jan 26
Fair value Increased 0.98%CVS Health: Rebuilding a Healthcare Giant From the Inside Out
CVS Health (NYSE: CVS) has not been an easy stock to own. Over the past year, investors have watched margins compress, guidance get revised, and sentiment sour as healthcare cost inflation collided with reimbursement pressure. In many ways, CVS became a symbol of everything investors feared about large, complex healthcare operators: too many moving parts, too much regulation, and not enough near-term clarity.
But stepping back, the current narrative may be missing the forest for the trees. CVS is no longer trying to be a faster pharmacy. It’s trying to be a more complete healthcare system—and that distinction matters more than quarterly volatility suggests.
From Retail Pharmacy to Vertically Integrated Care
CVS’s transformation has been deliberate, not flashy. The company has spent years assembling pieces that most healthcare players don’t control simultaneously: insurance (Aetna), pharmacy benefit management, retail pharmacies, primary care clinics, and home-based services. Few companies operate across that entire spectrum.
The logic is straightforward. Healthcare costs don’t spiral because prescriptions are expensive in isolation—they rise because care is fragmented. CVS’s long-term thesis rests on reducing that fragmentation. When the same organization manages insurance coverage, medication adherence, primary care access, and follow-up, inefficiencies shrink. At least in theory.
The challenge, of course, is execution. Integrating systems at this scale is expensive and time-consuming, and the payoff rarely shows up cleanly in a single quarter’s earnings.
Why the Care Model Matters More Than the Store Count
One of the biggest misconceptions about CVS is that its future depends on retail foot traffic. In reality, retail pharmacies are increasingly a distribution layer, not the value driver. The real leverage lies upstream and downstream—care coordination, chronic condition management, and preventive health.
This is where CVS’s clinic expansion and care delivery strategy become critical. Rather than competing head-on with hospitals, CVS is positioning itself where patients interact most frequently: routine care, medication management, and ongoing health monitoring. These are not high-margin services individually, but together they create durability.
In an aging population with rising rates of chronic illness, that durability can be more valuable than episodic growth.
Expert Perspective: Why Integrated Care Changes Outcomes
According to Janee Young, Clinical Director at Wellness Detox of LA, healthcare outcomes improve meaningfully when treatment moves beyond isolated interventions.
From her clinical experience, patients benefit most when systems address behavioral health, lifestyle factors, and medical treatment together—not as separate handoffs between providers. Fragmented care often leads to relapse, poor adherence, and repeat interventions, which ultimately drive costs higher.
That perspective helps frame CVS’s strategy in a more favorable light. While the company’s near-term margins face pressure, its model aligns with a broader shift toward whole-person care—one that prioritizes continuity over episodic treatment.
The Cost Curve Problem CVS Is Trying to Solve
Healthcare inflation remains the elephant in the room. CVS has openly acknowledged that rising medical costs have weighed on results, particularly within its insurance segment. But this is also the problem CVS is structurally designed to attack.
If CVS can improve medication adherence, reduce unnecessary hospital visits, and guide patients into lower-cost care settings, it doesn’t just benefit patients—it benefits its own cost structure. Few companies are positioned to internalize those savings the way CVS can.
That said, the timeline is uncertain. Infrastructure investments, staffing, technology integration, and regulatory compliance all require capital before efficiencies emerge. Investors expecting a quick rebound may be disappointed. Those willing to look further out may see something different.
Valuation vs. Patience
At current levels, CVS trades more like a troubled insurer than a healthcare platform in transition. The market is pricing in execution risk—and rightly so—but may also be underestimating the resilience of CVS’s cash flows and its strategic optionality.
This is not a momentum stock. It’s a patience stock. The upside case hinges less on explosive growth and more on steady normalization: stabilizing medical costs, improving care efficiency, and proving that vertical integration can work at scale.
The Bottom Line
CVS Health is rebuilding itself while still operating at full scale, a difficult balancing act that has weighed on investor confidence. Yet its strategy aligns with where healthcare is headed, not where it’s been. If integrated care becomes the standard rather than the exception, CVS may eventually be seen not as a laggard, but as an early mover that endured the hardest part first.
CVS Health has just faced a stock decline of about 10% after its preliminary Q3 earnings miss, which made the entire market aware. The decline is contributed largely to a $1.1 billion charge connected with its Medicare and Individual Exchange businesses and a whopping $1.2 billion restructuring charge for store closures. The result has been increasing uncertainty, thanks in part to leadership changes and rising medical costs, with investors questioning whether CVS can indeed make the shift from retail to a healthcare model. The recent drop in the stock embodies the skepticism and cautious optimism of investors as the business faces pressure to increase operating income while checking the rise in expenses in the Health Care Benefits segment.
Regardless of these risks in the near term, the present valuation for CVS indicates that the stock is undervalued by the street. At a P/E ratio of 10x, or significantly lower than the sector average, CVS prices in at a 71% discount to its peers and points to some significant upside should it be able to execute on its turnaround strategy. In H1 2024, revenue in the HCB segment increased by 23% YoY, indicating promising growth avenues. That undervaluation of CVS, in addition to expected EPS growth in 2025, just makes it a stock to closely watch as it works itself out of costs versus profitability for the long-term investor.
CVS Health's HCB Surge: Government Contracts Fuel 23% Revenue Growth Amid Cost Challenges
CVS Health's valuation growth is solidified by the progressive top-line of its Health Care Benefits (HCB) Services segment. Over Q2 2024, the segment derived a revenue of $32.5 billion, a +21.4% YoY increase, and for H1 2024, the revenue grew to $64.7 billion in 2024 (+23% YoY). This marks the segment’s capability to capture higher market share across various product lines and effectively manage growth initiatives. The primary driver behind this segment’s revenue surge is the premium revenues. These have jumped by 22.2% in Q2 and 23.5% over H1 2024. Premium revenues mark the bulk (1/3) of CVS Health’s top-line.
There is an important trend in premium revenues in the relative contribution of government and commercial businesses. For Q2 2024, the government business contributed $22.2 billion, which represents 68.7% of the total premium revenues. This marked a YoY increase of 23.8% against the 17.9% growth in the commercial business, which contributed $8.43 billion. Over H1 2024, government businesses experienced a similar growth trend.
The business expanded by 23.9% to $43.9 billion. While the commercial business grew by 22.4% to $17.1 billion, the government segment’s outperformance reflects CVS Health's lead in leveraging Medicare and Medicaid contracts. The 1.3 million medical members increase based on Medicare and the Individual Exchange points to CVS’s strategic focus on these higher-growth areas. Moreover, the Oklahoma Medicaid contract that went live in April 2024 further fueled this expansion.
Within CVS Health's HCB operations, the Medical Benefit Ratio (MBR) increased to 89.6% in Q2, with a jump of 3.4%-points from 86.2% in Q2 2023. Similarly, in H1 2024, MBR went up to 90%, up from 85.4% in 2023, up 4.6% points. While the rising MBR indicates higher medical costs that could present a headwind in the short term, the increase is in line with increased acuity levels, Medicaid redeterminations, and Medicare trends.
CVS increased its MBR guidance for the full year 2024 to 90.6%-90.8%, up from prior guidance of 89.8%. Guidance now factors in the proactive steps the company is taking to manage increased risk from the 2024 Individual Exchange and ongoing Medicaid rate dislocations. Despite ACA headwinds notwithstanding, CVS's ability to extend medical membership and revenues represents a formidable degree of operational adaptability that supports good business growth.
CVS Health Boosts Investment Income, Expands Membership, and Eyes Turnaround with $2B Restructuring Plan
Beyond core operational metrics, CVS Health’s HCB operations have demonstrated strength in net investment income. The income increased sharply by 46.3% YoY to $300 million in Q2 2024, and for H1 2024, net investment income jumped by an even wider 77% to $653 million in 2024. This significant increase in investment income points to CVS Health’s strong portfolio management capabilities to generate returns from its financial assets. However, the rising interest rate environment in H1 2024 has likely contributed to this surge, enabling the company to boost its earnings through higher investment yields.
Moreover, the HCB segment’s medical membership stood at ~27 million (+1.3 million members YoY). Sequentially, the company added 200K new members in Q2, highlighting the steady expansion of its health plan offerings. This consistent membership growth provides a stable base for recurring revenues and boosts CVS’s ability to scale its consolidated top-line through healthcare services over time. This top-line expansion may benefit the company’s valuations.
Finally, according to the medical tech visionary Nirav Chheda, CVS Health is undertaking a $2 billion restructuring plan, aiming for a turnaround by FY2025 through cost-cutting, operational efficiencies, and advanced technology integration. Key strategies include consolidating healthcare assets and refining Medicare pricing to improve margins while managing rising costs. Successfully integrating new acquisitions like Signify Health and Oak Street Health will be essential for growth, though these come with high initial costs. Facing regulatory pressures, CVS is also considering potential divestitures to simplify its complex operations. If effectively executed, this plan could stabilize CVS and position it competitively for long-term growth.
A Deeply Undervalued Healthcare Giant with Strong Upside Potential
The DCF valuation of CVS Health calculates a fair value of around $103, indicating a 45% undervaluation compared to its current market price of $56.49. This valuation uses several key inputs: a discount rate of 9%, chosen to balance CVS's growth potential and industry risk, and an EPS growth rate of 4.7% over ten years, which accounts for expected stable, long-term growth.
The model divides growth into two stages: a higher growth rate of 7% for the first decade, reflecting CVS’s expansion strategies in healthcare, and a 4% rate for the terminal stage, capturing a slower, mature growth phase. Revenue growth is assumed at 9.3% annually over ten years, driven by CVS’s scaling healthcare services. Finally, the DCF includes tangible book value and a margin of safety, highlighting the conservative nature of the model. Together, these inputs suggest CVS’s intrinsic value could be significantly higher than its current stock price.
On a relative basis, CVS trades at a very low 9.9x P/E multiple relative to its peer average of 26.0x. For example, direct competitors like Labcorp at 34.2x, Cigna at 39.7x, and Quest Diagnostics at 23.1x show significantly higher P/E ratios compared with CVS, indicating that the latter is trading way below industry marks. This lower multiple would suggest undervaluation, as CVS could close such a valuation gap if the company can demonstrate stabilization of operating income and increased margins. The difference reflects investor concern about the near-term earnings for CVS but also reflects upside potential if CVS can convince investors it can regain its consistency in profitability.
By both absolute and relative bases, CVS is undervalued and, therefore, an attractive investment, most especially for value investors who would be more patient and wait for the company to solve its temporary problems. The discount of the stock versus its sector peers and estimate of intrinsic value point toward a strong upside potential, assuming that CVS delivers on its cost-cutting initiatives and effectively integrates recent healthcare acquisitions. It could also give CVS an opportunity, if successful, for re-rating toward a valuation more aligned with the average within its industry segments, thereby creating shareholder value.
Takeaway
CVS Health’s recent stock drop reveals a deeply undervalued healthcare giant with strong upside potential if its $2 billion restructuring plan succeeds in boosting profitability and stabilizing growth.
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