CVS Health Q1 Earnings: Can MLR Improvements Offset Headwinds?

CVS Health (NYSE: CVS) is set to release its first-quarter 2025 earnings on May 1st, with investors closely watching whether its Medical Loss Ratio (MLR) trends can deliver a much-needed boost to profitability. Analysts at UBS have highlighted MLR dynamics as a key driver of the company’s financial outlook, though lingering challenges in its pharmacy and health services segments cloud the picture. Here’s what investors need to know.

The Role of MLR in CVS’s Q1 Earnings

The MLR measures the portion of premiums spent on medical care. For insurers like CVS, a lower MLR means higher profits. UBS’s analysis suggests that CVS’s MLR could improve by 60 basis points in 2025, driven by delayed Medicare Star Ratings recovery and cost efficiencies in its health care benefits (HCB) segment. This improvement is critical because the HCB segment, which includes Medicare Advantage and Part D plans, serves 36 million members and accounts for a significant portion of CVS’s revenue.

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However, UBS tempered its optimism, noting that the HCB segment faces persistent headwinds. The firm lowered its 2025 EPS estimate to $8.75 from $9.20 due to slower-than-expected Stars performance and regulatory pressures in Medicare/Medicaid programs. The Stars bonus payment—a potential $700 million reward for membership retention—remains uncertain, adding volatility to the outlook.

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Dividend Stability Amid Uncertainty

CVS’s dividend remains a key investor draw. The company recently declared a $0.665 quarterly dividend, yielding ~3.96% at current stock prices. This dividend stability contrasts with its earnings volatility, but UBS warned that capital allocation priorities (e.g., maintaining an investment-grade credit rating) may limit buybacks and growth investments.

Pharmacy and Health Services Struggles

The pharmacy segment continues to weigh on results. UBS projects negative low-single-digit EBIT growth for 2025, citing delays in the Cost Vantage initiative, which aims to streamline pharmacy operations. Similarly, the Health Services Segment (HSS) faces headwinds from Optum Specialty Health (OSH), dragging down margins. These issues could offset gains from MLR improvements.

Market Reaction and Valuation

CVS’s shares have underperformed the broader market in recent months, down 2.7% over the past month versus the S&P 500’s -4.3% decline. While the stock trades at a P/E of 10.36—well below its 5-year average of 14.8—the yield of nearly 4% and strong free cash flow ($12.2 billion in 2024) provide a floor.

UBS maintained a "Buy" rating but cut its price target to $85 from $90, reflecting near-term risks. The firm emphasized that 2025 EPS growth hinges onStars recovery and operational execution, with low double-digit growth now contingent on capital efficiency.

Conclusion: A Mixed Bag for Investors

CVS Health’s Q1 earnings will be a litmus test for its ability to balance MLR improvements against persistent challenges. While UBS’s MLR projections suggest optimism, the pharmacy and HSS segments remain vulnerabilities. Key data points to watch include:
- MLR trends: Whether Q1 results align with UBS’s 60-basis-point improvement forecast.
- Star Ratings: Updates on Medicare Advantage membership retention and the $700 million bonus.
- Pharmacy performance: Cost Vantage’s impact on margins and EBIT growth.

Investors should remain cautious but not dismissive. CVS’s scale—9,000 retail pharmacies, 1,000 clinics, and 90 million PBM members—offers long-term resilience. If Q1 earnings demonstrate stabilization in core segments, the stock could rebound. However, a miss on MLR or Stars targets might reignite selling pressure. For now, the 3.96% dividend yield and sub-11 P/E provide a margin of safety, but execution will be the ultimate driver of returns.

In short, CVS’s Q1 results are a pivotal moment. Investors should monitor these metrics closely to gauge whether the company can turn around its profitability—or if structural headwinds persist.