Is CVS Health Stock a Buy?

CVS Health (CVS -0.96%) has been a long-running migraine for shareholders, struggling to manage rising medical costs that have impacted profitability. At the time of writing, the stock is down 25% year to date and more than 40% lower than its record-high price of $101.29 set in February 2022.

The headline numbers don't project the best vital signs, but there are several reasons for investors to look up. The potential that this healthcare giant finds the right prescription to generate stronger earnings into 2025 could mark the start of a major comeback.

Let's discuss whether CVS Health stock is a buy right now.

Many moving parts in CVS Health

CVS Health is recognized as the largest pharmacy chain in the United States with over 9,000 locations. The company leverages that retail network as a point of access for a broader range of health services and pharmacy benefits, alongside its Aetna health insurance unit with more than 27 million members.

While that vertically integrated business model is intended to capture savings and efficiencies across the healthcare supply chain, recent results have disappointed. A surge in enrollment across its health plans, particularly among seniors covered under Medicare Advantage plans, coupled with high utilization and ongoing cost pressures, have directly impacted profitability.

Simply put, CVS underestimated its medical costs when pricing healthcare plans for 2024, leading to a wide deficiency in premiums this year. In the third quarter, CVS reported adjusted earnings per share (EPS) of $1.09, down from $2.21 in the prior-year quarter.

On the other hand, even as the financial margins have taken a hit, the top-line growth remains solid. Total revenue increased by 6.3% year over year, as the healthcare segment added 1.4 million members compared to last year. That momentum helped fuel a record quarter for pharmacy sales during which CVS filled 432 million subscriptions, up 9% from Q3 2023, increasing its market share of scripts filled nationally to 27.3%.

The takeaway is that CVS Health has some challenges in controlling costs in the Aetna healthcare business, but its overall operating trends and brand momentum are strong. While not providing formal guidance, comments by management during the earnings conference call signaled optimism in the company's long-term outlook.

Image source: Getty Images.

CVS turnaround in 2025

Any financial turnaround starts by addressing the key issues. The good news is that CVS Health is taking a proactive approach to getting back on track starting with a shakeup of the management team. In recent months, the company has announced a new CEO, added four new outside board members, and also brought in a former executive from rival UnitedHealth Group to run the Aetna unit. A fresh strategic start could be just what the doctor ordered.

The expectation is that higher pricing for its 2025 Medicare Advantage plans will result in some loss of memberships through disenrollment, but ultimately kick-start a recovery of margins and earnings. CVS is also targeting $500 million in cost savings next year, including closing 270 underperforming stores to optimize the company's retail footprint.

Compared to the Wall Street analyst consensus for adjusted EPS of $5.34 this year, the forecast is for a 20% rebound in 2025 to $6.39. No doubt, there is uncertainty in these estimates and many moving parts. Still, there are signs that over the next few quarters CVS Health should make progress in delivering higher earnings -- and this could be a catalyst for the shares to rally higher.

Data source: Yahoo Finance. YOY = year over year.

I'm cautiously bullish on CVS stock

CVS Health is far from perfect, but I believe its outlook has enough positives to turn cautiously bullish on the stock. With shares trading at a price-to-earnings (P/E) ratio of just 11 based on the consensus 2024 EPS estimate, investors can pick up an industry leader at a bargain price.

What I like about the stock is its attractive 4.5% dividend yield with an expectation that the quarterly payout will remain well supported by underlying cash flow. Whether the company's turnaround takes hold in 2025 or later, shareholders are being paid to wait. With a long-term time horizon, CVS Health stock can be a good addition to a diversified portfolio.