Humana Inc

NYSE:HUMUnited States

By Ian Salisbury Shares of CVS Health just went on sale. But like Valentine's candy in March, just because something is cheap, that doesn't make it a good buy. Shares of the convenience-store-turned-health-insurance giant plunged 17% Wednesday after it posted earnings that disappointed investors' already tempered expectations. CVS posted a first-quarter operating profit of $1.31 a share, well below the FactSet average analyst forecast for $1.69. The culprits: higher Medicare Advantage costs and ongoing weakness in its pharmacy benefits unit. Investors were unsparing, sending the stock down to $56 from $68 -- the level it traded at a decade ago. Shares were on pace for their largest percentage decrease since November 2009, making the stock the worst performer in the S&P 500 on Wednesday, according to Dow Jones Market Data. The discounted stock makes CVS, by some metrics, look attractive. Its price-to-earnings ratio now stands at 6.9 times estimated 2024 earnings and 6.2 times 2025 estimates. That's roughly a third of the S&P 500's forward multiple of 20 times. And the stock's 4.8% dividend yield is well above the 1.6% average for healthcare stocks. More likely, however, CVS is a classic value trap. While consumers may know CVS for its 9,000 convenience stores, today that segment generates less than 30% of its total revenue. Unfortunately, CVS's other two main businesses -- managing pharmacy benefits and providing health insurance -- are both struggling, delivering simultaneous double-digit declines in first-quarter operating income. Building a business into a conglomerate, like CVS is today, is supposed to help weather rough patches, as weakness in one area offsets strength in others. The flip side: When two major business lines face setbacks at once, it can provide a difficult hole for a company to climb out of. CVS's 2018 acquisition of Aetna, which made it a major player in health insurance, was supposed to help contain costs, while reaching consumers in storefronts they were already familiar with. In recent years, CVS has also bet big on Medicare Advantage, a privately administered version of the U.S. government's health plan for seniors. While enrollment in Aetna's Medicare Advantage plan has surged, costs have too, crushing CVS's margins. Last quarter the segment's medical benefit ratio, which measures the share of premiums spent on healthcare, rose to 90.4% from 84.6%. Seniors sought more care while the unit coped with a decline in its star ratings -- performance scores awarded by the government which can affect payouts. The upshot was a $1.1 billion decline in segment operating income. CVS is hardly alone in struggling with Medicare Advantage costs. UnitedHealth Group has declined nearly 10% this year. Humana, which derives most of its business from Medicare Advantage, has fallen more than 30%. Unfortunately, CVS has been forced to fight a war on two fronts. CVS's pharmacy benefit management business -- its largest by revenue -- has its own problems. There, the recent departure of an unnamed major client and losses from its 2023 Oak Street acquisition led to a second operating profit slump -- of more than $300 million. Perhaps the only bright spot was the old CVS retail pharmacy unit -- its smallest by revenue. Operating profits grew by 3%, or about $43 million. Perhaps a solid result, but hardly enough to offset dramatic losses elsewhere. When will CVS turn things around? Investors will have to be patient, even in a best-case scenario. In a conference call Wednesday, CEO Karen Lynch said the company had a plan to return to its target margins, but gave a time frame of three to four years. Investors may be taking recent CVS's forecasts with a grain of salt. On Monday, the company also cut its 2024 operating earnings to $7 a share from $8.30 -- the second revision in the past six months. Wall Street appears to be getting fed up. Leerink Partners analyst Michael Cherny downgraded the stock to Market Perform and slashed his price target from $87 to $60 on Wednesday. "This quarter exacerbated too many unknowns for us to remain constructive, even on a depressed multiple," he wrote in a note. Even candy sometimes gets cheap for good reason. Write to Ian Salisbury at ian.salisbury@barrons.com This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal. Corrections & Amplifications Michael Cherny is an analyst at Leerink Partners. A previous version of this article incorrectly spelled his last name as Cherney. (END) Dow Jones Newswires May 08, 2024 13:36 ET (17:36 GMT)

By Josh Nathan-Kazis and Jack Denton

CVS Health caught a bad case of the Medicare Advantage blues this past week, blaming the program for its failure to meet quarterly-earnings expectations and slashing its full-year guidance. Shares plunged 19% on Wednesday, their largest decline since 2009. Analysts were shocked. "Did not even believe the CVS numbers when they were released," Mizuho healthcare equity strategist Jared Holz wrote on early Wednesday.