CVS Health

On Oct. 8, the Centers for Medicare and Medicare Services released Medicare Advantage star ratings, including composite figures and ratings for each plan. Humana rose 13% in after-hours trading while other MCO shares were much less volatile.

Why it matters: Humana's shares rose as a key plan received a rating of 4 stars for 2027, versus 3.5 stars in 2026. That change should improve marketing in 2027 and materially boost profits in 2028, after a couple of years of that key plan falling below the 4-star threshold. Plans rated 4-star or higher receive 5% higher benchmark rates versus 0% for 3.5-star or lower plans, which can make a significant difference in the profitability of Medicare Advantage plans that typically only target low- to mid-single-digit operating margins. With the important annual enrollment period scheduled to start on Oct. 15, 71% of MA members are currently enrolled in 4-star plans or above for 2027, up from 67% in 2026. So aside from Humana's big improvement, we expect relative stability across the industry, although key MA insurers will likely make announcements about this important measure shortly.

The bottom line: We are raising our fair value estimate for narrow-moat Humana to $502 per share from $350, pushing our assumptions closer to our previous bull case, which depended on significant margin improvement as Humana improves its Medicare Advantage fundamentals. We appreciate this step in the right direction from Humana and think it bodes well for future profit growth at this MA-concentrated firm. Specifically, we now assume Humana can reach at least $40 of earnings per share by 2030, up from closer to $30 in our previous model. However, we still see significant uncertainty around Humana's profit trajectory on both the upside—primarily if margins rise higher or faster than anticipated—and the downside, related to ongoing regulatory concerns.

BLANK PAGEFor more details on how Humana stacks up against its peers, along with the industry's growth prospects, moat ratings, moat sources, and regulatory concerns, please see our September 2026 Industry Landscape on managed care organizations.

We are raising our fair value estimate to $110 per share from $105 per share to reflect recent cash flows and its higher 2026 outlook, including revenue of at least $414 billion (up from at least $405 billion previously), adjusted EPS of $7.90-$8.10 (up from $7.30-$7.50 previously), and operating cash flow of at least $11.5 billion (up from at least $9.5 billion previously).

After significant improvement in 2025 from a weak base, we expect 4% revenue growth compounded annually through 2030, including low-single-digit growth from its retail operations and mid-single-digit top-line growth from its other segments. We expect margins to continue expanding as the firm aims to fix the current mismatch in rates and medical utilization in its medical insurance business. Through 2030, we project 12% adjusted EPS growth compounded annually, including significant future margin improvement and share repurchases that resume in the near future.

Our base-case scenario includes 13% growth through 2028 compounded annually, which is on the low-end of management's midteen goal given at its late 2025 analyst day. Also, beyond 2026, material share repurchases may be necessary to help CVS boost its EPS. We take a value-neutral stance on those repurchases.

In early 2025, we lowered our moat rating to none from narrow after the firm's medical insurance business fell to a large operating loss in 2024 that may take many years to resolve from an economic profitability perspective. In our base-case scenario, we estimate CVS's economic profits may not exceed capital costs until 2028, despite ongoing efforts to boost margins. Even if it returns to economic profitability, the margin of safety on those economic profits may remain slim and could be competed or even acquired away, given the tough end markets the company participates in and CVS' penchant for transformational acquisitions that constrain ROICs.

Medical Insurance: Moat Damaged by Poor Underwriting in Surging Utilization Environment

Poor underwriting in the Medicare Advantage market and surging medical utilization trends led CVS to severely misprice its MA plans for 2024. In MA, CVS generated a mid-single-digit operating loss in 2024 due to poor plan designs, when it usually generates a positive mid-single-digit profit margin. While we think exits of unprofitable geographies and cuts to extra benefits should help CVS improve margins in that business over time, the company is limited by regulations on how much cost it can push back onto MA members, and its own outlook suggests that it will take a multiyear endeavor to get MA margins back to target. We estimate that challenges in this business may prevent CVS from returning to economic profitability for several years, and another mispricing or other challenge could delay that progress even further, which keeps us cautious about this business.

However, CVS may be able to improve results in this segment over time, and we typically see the potential for two moat sources—cost advantage and network effect—in this business that may help CVS reestablish a moat in this segment (and potentially the company) eventually.

Pharmacy Benefit Manager: Retains Signs of a Narrow (but Weakening) Moat

CVS also provides pharmacy benefit management services, which appear competitively advantaged with a combination of moat sources. The PBM industry has consolidated into three top players—CVS, UnitedHealth, and Cigna—controlling about 80% of US prescription volumes on an adjusted basis, and we believe those players built their leadership positions on previous cost advantages. While these companies do not appear to have significant cost advantages over each other now, we see evidence of some switching costs and network effects in this industry.

Although CVS' recent and potential contract losses suggest that its company-specific advantages may have weakened a bit, we see some switching costs in this business, with contract lengths typically around three years and annual retention rates in the high 90s for all three of the top-tier PBM players. Switching the administrative activities, partner relationships, and pharmacy benefit plan specifications to a new PBM vendor can be time-consuming and onerous, which creates inertia for clients with limited realistic alternatives, in our opinion. However, switching is possible, and the loss of specific clients is already constraining CVS' growth now and could continue to do so, especially as new competitors, including key CVS client Elevance, take aim at this market.

In recent years, we have seen evidence of some network effects in the PBM industry, with other PBMs losing share to the Big Three. Broadly, we continue to think clients are most attracted to the discounts they can get on drugs due to a PBM’s scale-driven negotiating power with other stakeholders in this market, primarily drug manufacturers and pharmacies. As more users are attracted to top-tier PBMs, drug manufacturers and pharmacies have incentive to offer even larger discounts to benefit from those volume-based discounts, which can help the Big Three attract even more users and create a virtuous cycle, or a network effect, in the long run. However, the recent loss of the Centene contract to Cigna in 2024 and the potential loss of the Elevance contract suggest CVS' company-specific network effect is being challenged at least in the intermediate term.

Retail Pharmacy: Stores Face Too Many Challenges to Dig a Moat

CVS possesses a top-tier retail pharmacy that appears to have some positive qualities, albeit probably not a moat, as pressures mount on its business model. CVS operates a large, convenient store network that is attractive for PBMs when assembling pharmacy benefit plans to obtain volume-based discounts from pharmaceutical manufacturers and when assembling convenient retail store locations that would be attractive to insurance plan members. Also, its retail store locations give CVS a unique asset that could be valuable eventually from an economic profit perspective, if leveraged properly. However, as rising tides raise all boats, we suspect a receding tide in this business negatively affects CVS and will continue to cut into the company from a moat perspective, as PBMs continue to squeeze this part of the drug supply chain. This ongoing pressure has contributed to significantly lower segment margins in recent years, and management only has a flat outlook for profits, despite CVS’ advantages over peers.

Regulatory Concerns Primarily Surround the Medical Insurance and PBM Businesses

During the next 10 years, we view scenarios where CVS provides medical and pharmaceutical benefits through employers and government programs as much more likely than not. However, regulators appear to have set their sights on the managed care industry as one that needs reform. For example, in the PBM, transparency-related changes have already been enacted, but other actions may be on the horizon, too. Regulatory changes in Medicare Advantage, too, could keep returns on invested capital below the weighted average cost of capital for the long run at CVS, which informs our no-moat rating.

CVS' diverse operations create the opportunity to view a patient more holistically by managing both medical and pharmacy benefits, which could lead to revenue and cost synergies for the organization.

The firm's entry into provider services has the potential to improve returns for all of CVS' segments if it can help patients more easily and cost-effectively manage chronic conditions through early intervention.

CVS' PBM remains an industry leader due to its intense focus on pharmaceutical cost trends, which should continue to attract clients.

Healthcare reform will likely remain a recurring political topic until universal, affordable coverage is achieved in the US, and CVS' stock may experience volatility if scenarios that threaten its prospects gain traction.

Foot traffic at physical retail stores could continue to decline as consumers increasingly favor online retailers like Amazon for offered goods, creating the need to reinvent operations.

CVS' long-term profit growth prospects appear lower than its managed care peers' primarily due to the long-term challenges it faces in its retail operations.