Shares of CVS Health (CVS 1.56%) have nosedived 28% so far in 2023. The company's business performance has disappointed this year with the bottom line falling by a whopping 37% in the most recent quarter. There was also the recent news that Blue Shield of California would be using other pharmacy benefits managers, limiting its exposure to CVS.
In light of these developments, is the healthcare company in trouble? Or could now be a good time to buy the stock, while pessimism is high?
Why CVS' earnings were down big last quarter
For the period ended June 30, CVS reported a steep decline in income. Earnings of $1.9 billion were down from the more than $3 billion that the company earned in the same period last year. Although its sales were up over 10%, rising expenses more than wiped out those gains.
Image source: Company filings. Chart by author.
CVS has closed on multiple acquisitions within the past year, including its purchase of primary care operator Oak Street Health and home health company Signify Health. Anytime there are new acquisitions, costs can rise at least temporarily while a business works on efficiencies and synergies. This past quarter, CVS incurred $496 million in restructuring expenses that were part of its goal to streamline operations and ultimately reduce costs.
Multiple segments have seen earnings declines
Although CVS' operations are diverse, the company has struggled on multiple fronts. Healthcare-related expenses rose by $4.3 billion. The company noted in its benefits segment that the medical benefits ratio was 86.2% versus 82.7% in the prior-year period. That means the company is paying more in benefits expenses in relation to what it is receiving in premiums.
Image source: Company filings. Chart by author.
Earlier this year, UnitedHealth Group said that due to pent-up demand for surgeries, its expenses would be rising. Seeing benefits-related expenses rise in CVS, which offers health insurance through Aetna, should come as little surprise. The health benefits segment saw the biggest year-over-year decline in earnings, with its operating income falling by 20% to $1.5 billion.
Another headwind the company faced was a drop in COVID-related vaccinations and testing. As a result, adjusted operating income from its pharmacy and consumer wellness segment declined by 17% to just over $1.4 billion.
NYSE: CVS
Key Data Points
Is CVS Health a bad-news buy?
Shares of CVS Health are trading near their 52-week lows and things appear to be going from bad to worse. Blue Shield of California has indicated it is going to move most of its business from CVS and instead use other pharmacy benefits managers. That combined with the company's underwhelming quarterly results has made investors bearish on the healthcare stock.
There aren't, however, any significant headwinds that would make me concerned about the business right now. Potentially losing a customer such as Blue Shield could adversely impact business, but these customers are only using other pharmacy benefits managers and aren't leaving CVS entirely.
Plus, CVS has become more diverse with Oak Street Health and Signify Health now part of its operations. The company still has a lot of growth potential ahead and investors could be making a big mistake by selling their shares of the business right now.
If you're willing to hold the stock for at least a few years, CVS could make for an underrated investment to buy today.
