Managed Care Margin Recovery And Healthcare Benefits Will Shape Industry Prospects

Key Takeaways

• Strong demographic trends and healthcare demand, alongside value-based care expansion, are driving CVS Health's revenue growth and market leadership in healthcare and pharmacy services.
  
• Strategic acquisitions, digital investments, and vertical integration enable operational synergies, improved customer retention, and sustainable margin and earnings growth.
  
• Margin and earnings pressures across core business lines, combined with structural challenges in retail and insurance, threaten sustainable long-term profitability and growth.

Catalysts

Provides health solutions in the United States.

• The rapidly growing senior population and increased prevalence of chronic diseases are driving sustained growth in demand for CVS Health's prescription services and broader healthcare offerings, as evidenced by significant revenue and prescription volume growth across all segments; these underlying trends are expected to further expand CVS's top-line revenue and market share in coming years.
  
• CVS Health's ongoing digital and technological investments, including streamlined operations, improved customer experience, and expanded digital health platforms, position the company to capitalize on consumer preferences for greater convenience and digital access, thereby strengthening customer retention and boosting net margins over the long term.
  
• Integration of recent and ongoing acquisitions (such as Aetna, Oak Street, and Signify Health) and vertical alignment between insurance, pharmacy, and care delivery provide substantial cross-selling and synergy opportunities, supporting long-term operating margin and earnings growth as margin recovery initiatives gain traction.
  
• Expansion of value-based care models, both internally and through partnerships, aligns CVS Health with the shifting reimbursement environment-rewarding coordinated, preventive care and enabling CVS to benefit from improved clinical outcomes, cost containment, and improved long-term profitability.
  
• Progress on transforming pharmacy reimbursement with models like CVS CostVantage and increasing pharmacy market share (including acquisitions of Rite Aid scripts), combined with sustained pharmacy script growth, are setting the stage for more predictable revenue and a durable operating income base amidst ongoing front-store and reimbursement pressures.

CVS Health Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CVS Health's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.2% today to 1.9% in 3 years time.
• Analysts expect earnings to reach $8.3 billion (and earnings per share of $6.85) by about September 2028, up from $4.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $10.1 billion in earnings, and the most bearish expecting $3.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.8x on those 2028 earnings, down from 20.1x today. This future PE is lower than the current PE for the US Healthcare industry at 21.0x.
• Analysts expect the number of shares outstanding to grow by 0.79% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.25%, as per the Simply Wall St company report.

CVS Health Future Earnings Per Share Growth

Risks

• Persistent elevated medical benefit ratios and margin pressure in the Health Care Delivery segment (especially at Oak Street) highlight ongoing challenges to achieving target profitability, which could suppress net margins over the long term.
  
• Continued pharmacy reimbursement pressure across both the retail and PBM businesses presents a structural headwind, potentially leading to stagnant or declining revenue and operating income despite ongoing efforts to stabilize with cost-based models.
  
• Slow, multi-year recovery and repricing cycles in Group Medicare Advantage contracts, with target margins not achievable after a single renewal in many cases, imply prolonged earnings and margin headwinds for the insurance segment.
  
• Front-end retail sales remain structurally challenged by changing consumer behaviors and digital competition; while there is some improvement, secular declines in in-store foot traffic could weigh on long-term retail revenue and profitability.
  
• Elevated medical cost trends and industry-wide pressures-including inflationary wage and labor costs, regulatory shifts (e.g., continued IRA impacts on Part D), and intensified focus on cost containment-threaten both revenue growth and sustainable earnings across CVS's integrated businesses.

Valuation

• The analysts have a consensus price target of $82.072 for CVS Health based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $99.0, and the most bearish reporting a price target of just $70.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $445.1 billion, earnings will come to $8.3 billion, and it would be trading on a PE ratio of 15.8x, assuming you use a discount rate of 7.2%.
• Given the current share price of $71.75, the analyst price target of $82.07 is 12.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.