CVS Health Corp (CVS) shares are taking a hit today, dropping by over 2% to $66.04, as investors digest the implications of UnitedHealth Group Inc’s (UNH) strong third-quarter financial results. The market’s reaction to UnitedHealth’s performance suggests a potential shift in the healthcare landscape that could put pressure on CVS’s growth strategy.
UnitedHealth, a behemoth in the healthcare industry, reported adjusted earnings per share (EPS) of $7.15, exceeding Wall Street expectations of $7.00. This robust earnings growth was fueled by a 2.4 million increase in its domestic commercial customer base and a 9.1% year-over-year surge in revenues, reaching $100.8 billion. These results showcase UnitedHealth’s dominant position in both healthcare services and insurance, areas where CVS is also seeking to expand, particularly after its acquisition of Aetna in 2018.
Optum, UnitedHealth’s health services division and a direct competitor to CVS’s healthcare service operations, posted remarkable revenue growth, generating $63.9 billion for the quarter. Optum’s strong performance, driven by its pharmacy services among other offerings, signals a potential threat to CVS’s Caremark PBM segment, which is responsible for managing prescription drug benefits for employers and health plans.
As Optum continues its rapid expansion, CVS might face an uphill battle to maintain its market share in both PBM and healthcare services. This challenge is further amplified as CVS strives to integrate its recent acquisitions, such as Oak Street Health and Signify Health, to bolster its primary care and home health offerings.
While UnitedHealth’s adjusted EPS outlook for 2024 remained in line with expectations, its lowered EPS guidance of $15.50 to $15.75, down from the previous $15.95 to $16.40, fueled market concerns about CVS. UnitedHealth’s resilience in navigating operational challenges, including a recent cyberattack on its Change Healthcare business, further underscores the competitive advantage it holds.
CVS, currently grappling with the integration of multiple acquisitions and facing ongoing scrutiny of its PBM practices, finds itself in a more challenging competitive landscape as UnitedHealth continues to assert its dominance. UnitedHealth’s expansion in membership and service capabilities puts a strain on CVS’s strategy to expand its healthcare footprint. Although CVS has invested significantly in building out its healthcare services beyond traditional pharmacy offerings, UnitedHealth’s robust earnings growth may hinder CVS’s ability to execute its expansion plans at a competitive pace.
Furthermore, investors are reacting to broader concerns about CVS’s exposure to regulatory risks. Both CVS and UnitedHealth have requested the recusal of Federal Trade Commission (FTC) Chair Lina Khan in ongoing litigation over pharmacy benefit manager (PBM) practices, highlighting the intense scrutiny surrounding these practices.
Wall Street analysts, on the whole, view CVS Health as a Neutral, considering the company’s history over the past three months. While Charles Ryhee from TD Cowen is the most optimistic analyst, forecasting a 44.07% rise in the stock in the coming year, the broader market sentiment towards CVS remains cautious. The stock’s performance over the past 3 months, rising by 6.3%, suggests improved investor opinion based on either its stock price or underlying fundamentals, like revenue, which increased by 2.6% over the past year.
CVS’s stock price has traded between a 52-week high of $83.25 and a 52-week low of $52.77. The current market reaction to UnitedHealth’s strong performance serves as a reminder of the competitive pressures facing CVS and the potential challenges it faces in executing its growth strategies.