CVS Beats Revenue Expectations, but Misses Profits Due to $1.1 Billion Reserve Charges

CVS Health Corp. shares surged on Wednesday morning after the healthcare services provider and pharmacy chain reported stronger-than-expected revenue for the third quarter. This revenue growth helped to balance a lower-than-anticipated profit, which took a hit from a $1.1 billion charge.

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CEO David Joyner commented on the quarterly performance, noting that CVS's results reflected strength in its health services, pharmacy, and consumer wellness segments. He also highlighted the need for ongoing, enterprise-wide efforts to address challenges in the healthcare benefits sector.

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The stock rose by 6.8% in premarket trading, marking what could be its biggest single-day increase following an earnings report in over five years, according to data from FactSet dating back to the third quarter of 2019.

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However, net income fell to $87 million, or 7 cents per share, compared to $2.26 billion, or $1.75 per share, in the same period the previous year. Adjusted earnings per share dropped to $1.09 from $2.21, missing the FactSet consensus estimate of $1.44 per share.

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CVS explained that this decline in earnings was mainly due to ongoing challenges in the healthcare benefits sector, which is grappling with elevated utilization pressures. The company recorded a $1.1 billion charge (or 63 cents per share) to establish premium deficiency reserves, which are anticipated to offset expected losses in the Medicare and individual exchange product lines during the fourth quarter.

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CVS added that these premium deficiency reserves are likely to be largely released in the fourth quarter of 2024, which should positively impact the company's results for that period.

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Revenue for the quarter rose 6.3% to reach $95.43 billion, surpassing the FactSet consensus forecast of $92.72 billion.

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In the health services segment, revenue declined by 5.9% to $44.13 billion, which CVS attributed mainly to the earlier reported loss of a major client and improved pricing for pharmacy clients. Additionally, the volume of processed pharmacy claims fell by 16.5%.

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On the other hand, healthcare benefits revenue surged by 25.5% to $33 billion, fueled by growth in the Medicare and commercial product lines. Within this segment, the $1.1 billion charge included $394 million in operating expenses linked to the write-off of acquisition costs, as well as $670 million in healthcare expenses.

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Revenue from CVS's pharmacy and consumer wellness segments climbed by 12.3% to reach $32.42 billion, which was driven by an increase in prescription volume. This included additional contributions from vaccinations and a favorable pharmacy drug mix.

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Despite this positive market reaction, CVS's stock had declined 29.9% in 2024 through Tuesday, while the Health Care Select Sector SPDR ETF gained 8.4%, and the S&P 500 advanced by 21.2%.

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