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Here's Why You Should Hold on to CVS Health (CVS) For Now

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·5-min read
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CVS Health Corporation CVS has been gaining on strength across all operating segments. The company ended the first quarter of 2022 with better-than-expected results. The significant membership growth within the Health Care Benefits arm instills optimism. Robust front store sales also seem promising. However, tough competition and mounting expenses are discouraging.

Over the past year, the Zacks Rank #3 (Hold) stock has gained 17.7% compared with 4.7% growth of the industry and 1.7% fall of the S&P 500.

The renowned pharmacy innovation company has a market capitalization of $129.64 billion. Its earnings for first-quarter 2022 surpassed the Zacks Consensus Estimate by 3.7%.

Over the past five years, the company registered earnings growth of 8.3%, which compares to the industry’s 8.6% rise and the S&P 500’s 13.4% increase. The company’s long-term projected growth rate of 7.6% compares to the industry’s growth projection of 5.6% and the S&P 500’s estimated 10.7% increase.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Let’s delve deeper.

Factors At Play

Q1 Upsides: CVS Health exited the first quarter of 2022 with earnings and revenues beating the Zacks Consensus Estimate. The impressive top-line performance was driven by sales growth across all three operating segments. The company administered more than 6 million COVID-19 tests and above 8 million COVID-19 vaccines nationwide in the reported quarter. The company’s ongoing efforts to address housing insecurities and enhance access to health care services in underserved communities seem encouraging. The raised EPS guidance for 2022 is indicative that this growth momentum will continue.

Health Care Benefit Shows Potential: We are upbeat about the Health Care Benefits business arm, which delivered strong sales growth in the first quarter, banking on membership growth across all product lines. On a sequential basis, the company saw membership growth of more than 670,000. The Medicare franchise also continued to benefit the Health Care Benefits arm as Medicare Advantage grew by about 200,000 members sequentially. The company recorded a medical benefit ratio of 83.5% within the commercial business, indicating continued progression toward normalized total medical costs.

Retail on a Growth Track: CVS Health’s Retail Long Term Care segment plays a crucial role as part of the company’s community-focused strategy. The business witnessed year-over-year growth of 9.2% in the first quarter on increased prescription and front store volume, including the sale of COVID-19 over-the-counter (OTC) test kits, the impact of a weaker cough, cold and flu season in the prior year and pharmacy brand inflation. Prescriptions filled increased 5.1% on a 30-day equivalent basis compared to the year-ago period.

In its first-quarter earnings call, the company noted that it is optimizing the retail portfolio, which will consist of three models: advanced primary care clinics, enhanced health hub locations and traditional CVS pharmacy locations.

Downsides

Escalating Costs: During the first quarter, CVS Health’s gross margin contracted 69 basis points (bps) to 17.4% on a 12.1% uptick in total cost (including benefit cost). Meanwhile, operating costs in the quarter rose 10.7% year over year, resulting in a 63-bp contraction in operating margin to 4.5%. The increase in operating costs is building pressure on the bottom line.

Competitive Landscape: Intense competition acts as a major impediment to CVS Health. Competition is especially tough in the pharmacy segment as other retail businesses continue to add pharmacy departments and low-cost pharmacy options are getting available. Discount retailers, in particular, have made substantial inroads in gaining market share.

Near-Term Challenges: The ongoing pharmacy reimbursement pressure continues to challenge the Pharmacy Services and Retail/LTC segments. CVS Health is making continued efforts to combat this reimbursement pressure by increasing volume and reducing costs.

Estimate Trend

Over the past 30 days, the Zacks Consensus Estimate for CVS Health’s 2022 earnings has moved 0.9% up to $8.30.

The Zacks Consensus Estimate for 2022 revenues is pegged at $307.93 billion, suggesting a 5.4% rise from the year-ago reported number.

Key Picks

A few better-ranked stocks in the broader medical space are AMN Healthcare Services, Inc. AMN, Medpace Holdings, Inc. MEDP and UnitedHealth Group Incorporated UNH.

AMN Healthcare has a long-term earnings growth rate of 1.1%. The company surpassed earnings estimates in the trailing four quarters, delivering a surprise of 15.6%, on average. It currently flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AMN Healthcare has outperformed its industry in the past year. AMN has declined 0.9% versus the 63.3% industry's fall.

Medpace has a historical growth rate of 27.3%. Medpace’s earnings surpassed estimates in the trailing four quarters, the average surprise being 17.1%.It currently has a Zacks Rank #2 (Buy).

Medpace has outperformed its industry in the past year. MEDP has declined 16.8% compared with the industry’s 63.3% fall.

UnitedHealth has an estimated long-term growth rate of 14.8%. UnitedHealth’s earnings surpassed estimates in the trailing four quarters, the average surprise being 3.7%. It currently carries a Zacks Rank #2.

UnitedHealth has outperformed the industry over the past year. UNH has gained 20.4% compared with 17.1% industry growth in the said period.


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CVS Health Corporation (CVS) : Free Stock Analysis Report

AMN Healthcare Services Inc (AMN) : Free Stock Analysis Report

Medpace Holdings, Inc. (MEDP) : Free Stock Analysis Report

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