After struggling for a few years, CVS Health (CVS +0.42%) is finally rebounding. Its shares have soared this year by 77%, largely due to improved financial results.
That said, the pharmacy giant still has a lot to do as it tries to fix parts of its business that still aren't performing as well as it would like. If CVS can make progress along those lines, it could maintain its recent momentum through the end of the year and perhaps carry it into 2026.
Should investors consider investing in CVS Health as the year draws to a close?
The rebound continues
CVS Health struggled amid mounting expenses, especially in its Medicare Advantage business. The increased activity in that segment did help push revenue higher, just not enough to cover the rapidly rising costs. This led to shrinking margins and earnings.
To make matters worse, CVS repeatedly lowered its guidance as it struggled to forecast rising medical costs that weighed on its bottom line. It needed to cut expenses and focus on more profitable growth. The good news is that the company is already making some headway along those lines.
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Last year, CVS announced a plan to initiate at least $2 billion in cost savings over several years, which would include closing down some stores and reducing its workforce. These efforts might already be paying off, as financial results have looked stronger this year. In the third quarter, revenue beat expectations: It came in at a company record of $102.9 billion, an increase of 7.8% compared to the third quarter of 2024.
CVS did report a $5.7 billion non-cash goodwill impairment charge related to changes within its healthcare delivery unit, which harmed its GAAP (generally accepted accounting principles) operating and net income. So looking at adjusted metrics is a much better indicator of where the business is going.
Adjusted operating income was $3.5 billion, up 35.8% year over year, with an operating margin of 3.4%, up from last year's 2.7%. And non-GAAP earnings per share came in at $1.60, up almost 47% year over year. Third-quarter earnings were strong, and CVS Health even increased its guidance for the fiscal year 2025. Can the momentum continue?
NYSE: CVS
Key Data Points
What does the future hold?
There are several reasons to think CVS could continue performing well over the next year.
First, the company will continue making adjustments to improve profitability. It plans to scale back its Medicare Advantage business, which has been the source of many of its woes in recent years. CVS also said it would exit the Affordable Care Act's health insurance market, another unit that was harming the bottom line. These changes might lead to lower revenue overall, but stronger top- and bottom-line growth in the near to medium term.
Second, despite a solid run this year, CVS Health's shares still look attractively valued. The stock trades at 10.7 times forward earnings, while the healthcare industry average is 17.1. While the company's challenges in recent years justify the lower valuation, its rapid turnaround makes the stock attractive at current levels, especially given that it's still getting started.
That means CVS could carry its momentum through the end of the year and into the next. But what about beyond? My view is that the stock is also an attractive long-term bet. The company's vast network of pharmacies and deep relationships with patients that have been shopping there for years -- sometimes decades -- grant it a strong competitive advantage.
On top of that, CVS offers a variety of health-related services, thereby keeping patients within its ecosystem, whether through its insurance operations, prescription drug business, or primary care services. And with major long-term tailwinds like the world's aging population, which will lead to increased spending on healthcare services, CVS should benefit over the long run.
Lastly, the stock is also a strong option for dividend seekers, given its attractive forward yield of 3.4% and reasonable cash payout ratio of 53.3%. So, even if it fails to perform well in the next year, CVS Health looks like an excellent pick for long-term income seekers.
