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CVS Health Earnings Preview: New CEO Poised to Tackle Rising Costs and Shifting Retail Landscape

AInvestTuesday, Nov 5, 2024 2:29 pm ET
2min read

CVS Health is set to release its Q3 earnings results tomorrow before the market opens, followed by an earnings call at 8:00 a.m. ET. The FactSet consensus forecasts a 34% year-over-year decline in adjusted earnings per share (EPS) to $1.46, accompanied by a 3% rise in revenue to $92.72 billion.

As the company prepares to share its financial performance, investor sentiment remains cautious, with CVS stock trading close to multi-year lows observed in May.

The current bearish sentiment surrounding CVS reflects the challenges it faces across multiple facets of its operations. From battling inflationary pressures that have softened retail demand to navigating increasing healthcare costs that have constrained profitability, CVS's complex business model spanning retail pharmacy, health insurance, and pharmacy benefit management (PBM) has been put to the test.

In Q2, CVS announced substantial strategic shifts aimed at reversing a downward trend in performance. These included leadership changes within Aetna, its insurance division, and the unveiling of a $2 billion cost-cutting plan that emphasized the integration of artificial intelligence to streamline processes.

Despite these efforts, investor response was lukewarm, as evidenced by the stock's stagnant performance following these announcements.

Since that period, further leadership changes have transpired. Karen Lynch, the former CEO, stepped down, and David Joyner, previously the executive vice president of CVS Health and president of CVS Caremark, assumed the CEO role.

The transition came as CVS issued subdued Q3 guidance, projecting an EPS range of $1.05 to $1.10, significantly under Wall Street's expectations.

As David Joyner steps into his new role, there is anticipation surrounding his strategic vision and the potential initiatives he may introduce to address CVS's challenges.

The medical benefit ratio (MBR), a critical metric that tracks the percentage of premiums spent on medical costs, has emerged as a pressing concern. In Q2, CVS reported a 340 basis point increase in its MBR to 89.6%, which significantly dented operating income. The company attributed this rise to previously discussed declines in Medicare Advantage star ratings for 2024.

Reducing these costs and stabilizing margins will likely be a top priority for the new CEO.

Moreover, CVS is nearing the completion of its plan to close 900 retail stores by the end of 2024, a move intended to optimize its retail footprint amid a challenging environment for brick-and-mortar locations. The company may consider additional closures, following the lead of Walgreens Boots Alliance, which recently announced the shuttering of approximately 1,200 stores.

The Health Services segment, encompassing CVS's medical clinics and Caremark, remains a crucial area of focus. Despite representing the company's largest segment, Health Services underperformed in comparison to the overall 3% revenue growth in Q2.

Given Joyner's previous leadership role within CVS Caremark, enhancing growth and operational efficiency in this segment is likely to be on his immediate agenda.

With market expectations set low for the upcoming earnings report, the new CEO has an opportunity to set a definitive course for the future. Implementing targeted strategies to curb rising costs, improve efficiency, and adapt to shifting market conditions could bolster investor confidence.

Conversely, if Joyner opts to adhere closely to the previous strategic path laid by former CEO Karen Lynch, there may be a risk of continued investor dissatisfaction.

The upcoming earnings release will not only reveal CVS's financial performance for Q3 but also potentially signal the direction that David Joyner intends to steer the company.

For investors, tomorrow's report will be a crucial indicator of how CVS plans to navigate the complex intersection of its retail, health insurance, and PBM businesses amid ongoing economic and industry challenges.

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