CVS Health stock soars on surprise boost from health insurance unit

CVS Health posted stronger-than-expected fourth quarter earnings Wednesday, including a narrowing of its key benefit-expense ratio, sending shares in the health insurance and retail giant soaring in early Wednesday trading.

CVS  (CVS)  said adjusted earnings for the three months ending in December were pegged at $1.19 per share, down nearly 44% from the prior-year period but well ahead of Wall Street's 93 cents per share forecast and the largest profit "beat" in at least four years. 

Group revenues, CVS said, fell 1.1% to $97.71 billion, but again topped analysts' estimates of a 97.2 billion tally as same-store sales rose 10.2%.

Looking into the coming year, the management said it sees earnings in the region of $5.75 to $6.00 per share, compared to the LSEG consensus of $5.96 per share,   

"We have continued to see growth in key areas of our business, including the Pharmacy and Consumer Wellness segment, while we address the industry-wide challenges that have impacted our Health Care Benefits segment," said new CEO David Joyner. 

"Through the continued dedication of our colleagues, we will be positioned for strong performance in 2025 as we deliver simply better care for consumers while improving outcomes and reducing costs," he added. 

Medical expenses peak? 

CVS Health, along with health insurance rivals UnitedHealth  (UNH) , Humana  (HUM)  and Cigna  (CI) , is facing a surge in medical costs tied to the aging demographics of its customer base plus a pullback in reimbursements from Medicare and Medicaid under new strictures from the Biden administration.

Longer-term concerns about profit margins in the sector have been tied to the U.S. Centers for Medicare and Medicaid Services' decision in the spring of 2024 to cap Medicare Advantage payments by an average of 3.7% for 2025.

Analysts were looking for an increase of around 4.7%, based on CMS's January proposal of 3.7%, and followed by an increase of around 1.22% each year between 2019 and 2024.

The payments, which reimburse insurers for treatments of U.S. patients over age 65, will be effectively lower than current levels when adjusted for costs and inflation. 

CVS' medical benefits ratio, which tracks the amount of payments made to the level of premiums its collects, narrowed to 94.8% over the final three months of the year, when compared to the third quarter tally, although it was still up more than 6 percentage points from the year-earlier period.

Analysts were looking for a tally of around 95.5%, according to LSEG data, suggesting that the key profit metric may have peaked and is one pace for further reductions into the coming year. 

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CVS Health shares were marked 10.9% higher in premarket trading immediately following the earnings release to indicate an opening bell price of $60.35 each, a move that would still tip the stock into positive territory for the past six months.

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