CVS Health Falls 24% in 3 Months: Should You Buy the Dip?

CVS Health CVS, the pharmacy retail and PBM powerhouse, has witnessed a substantial 24% decline over the past three months. In fact, during the last trading session, the stock closed at $56.62, which marked a more than 47% plunge from its 52-week high of $83.25 and was quite close to its 52-week low of $52.77.

Not only this, the stock is currently trading below its 50-day and 200-day moving averages, indicating the possibility of a further bearish shift in the stock's price.

CVS Below 50 & 200 Day SMA

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As the stock struggles to keep pace, it is now a big question for investors whether to get rid of CVS Health or grab a few more shares because the stock is hovering around its rock bottom. While the stock has been grappling with the industry-wide phenomenon of pharmacy reimbursement pressure, a turnaround might be in the cards, given its strategic initiatives that can change investors' perspectives in favor of CVS Health. Let us delve deeper.

What Pulled CVS Down?

Pharmacy Reimbursement Crisis: The entire retail pharmacy industry is currently grappling with continued pressure from non-reimbursable pharmacy expenses, which are significantly pulling down mass demand for prescription as well as over-the-counter drugs and vaccinations. Going by a National Association of Chain Drugs report, payors are substantially shrinking reimbursement, many times below the cost of buying and dispensing prescription drugs. This is putting substantial and unsustainable financial pressure on the companies to the extent that many of the industry players over the past year were seen either shutting down their entire business, reducing the number of stores or going private. CVS Health, like its industry peers, is severely affected by this ongoing crisis. In fact, despite the company reporting revenue expansion, the shrinking margins and earnings are pretty alarming.

Labor Shortage Plagues the System: Despite the end of the healthcare emergency, the lingering effects forced frontline pharmacy retail workers like doctors and medical staff to leave the field. According to the article "A Public Health Crisis: Staffing Shortages in Health Care," published in Favorite Healthcare Staffing, the WHO predicts a shortfall of 15 million healthcare workers worldwide in 2030. This is naturally creating huge operational hazards for companies like CVS Health, resulting in productivity loss. Going by a 2024 Boston Globe report, CVS has, in fact, acknowledged an "unprecedented" labor shortage among pharmacists and other staff, leading customers to complain about longer lines, unanswered phones and unclean stores.

Visible Silver Lining for CVS

2025 Roadmap Looks Impressive

CVS Health is committed to improving its Medicare Advantage margins in 2025. Given its predicted baseline performance, 2025 will be the first stage in a three to four-year journey to re-establish the company's target margins of 4 to 5%. Improved Star Ratings in 2025 might generate a $700 million tailwind, depending on membership retention levels. The remainder of the company's margin gain in 2025 will be driven by pricing initiatives in an environment where it is experiencing headwinds from an insufficient rate notice and prescription medication coverage changes that significantly raise plan liability.

CVS Health is accelerating long-term enterprise productivity measures to streamline and enhance its processes. The company's target remains to achieve low double-digit adjusted EPS growth in 2025.

Shares Outperform Industry

Over the past month, shares of CVS Health have lost 6.1%. However, the stock has outperformed the industry's 9.6% decline. While one of the company's peers, Herbalife Ltd HLF, registered a 2% decline, outperforming CVS, the company's prime competitor and another colossal pharmacy retail player, Walgreens Boots WBA, suffered a sharper decline of 29.4% during this period due to disappointing quarterly results and further guidance cut due to unfavorable industry forecasts.

One-Month Price Comparison

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Upbeat Estimates

With CVS' second-quarter 2024 results approaching, we expect the company to fare better than WBA. Not to forget, the company has the power to minimize its pharmacy reimbursement-related issues by adjusting its in-house PBM business strategies.

The Zacks Consensus Estimate points to revenue improvements of 3.1% and 5.5% for 2024 and 2025, respectively. However, reimbursement issues are likely to continue through the rest of 2024, creating significant bottom-line pressure for CVS Health. The Zacks Consensus Estimate indicates an earnings decline of 19.7% in 2024. However, there is some hope for investors that 2025 might get brighter, with the estimates showing a 10.6% improvement in earnings from the year-ago period.

The stock currently has a Growth Score of A.

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Waiting for a Better Entry Point Seems Prudent

As we have already discussed, the stock is currently positioned below its moving averages, which indicates potential negative movement. Further, the current earnings estimates show no visible sign of improvement until 2025.

In terms of valuation too, CVS Health's forward 12-month price-to-earnings (P/E) is 7.65X, a premium to the market's average of 7.09X. The company is also trading at a significant premium to other industry players like Walgreens Boots (4.9X) and Herbalife (6.8X). This suggests that investors may be paying a higher price relative to the company's expected earnings growth.

Premium Valuation

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Accordingly, despite the recent dip in share prices, this might not be the ideal time to invest in CVS Health. However, those who already own this Zacks Rank #3 (Hold) stock may stay invested as the company's financial stability and 2025 roadmap offer potential pathways to recovery.

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