CVS Health

After several years of elevated utilization that has not been fully offset by rate increases yet, covered MCO shares have risen about 35% on average since our last managed care industry report in September 2025, in anticipation of rising profits in at-risk medical insurance plans.

Why it matters: While trading much closer to fair value than they were about a year ago, the managed care organizations we cover still look moderately undervalued to fairly valued to us, with plenty of upside in their earnings growth prospects for the foreseeable future relative to norms. On average through 2030, we expect covered MCOs to grow earnings per share in the midteens compounded annually versus the typical industry goal of low-double-digit growth. This accelerated earnings growth looks likely due to potential margin improvement in at-risk plans—including Medicare Advantage (seniors), the individual exchanges, and Medicaid (low-income)—as the MCOs raise rates, adjust plan designs, and exit unprofitable geographies.

The bottom line: We continue to see reasonably valued to moderately undervalued shares in the managed care industry, even when considering their High to Very High Uncertainty Ratings, which remain about a notch above historical ratings due primarily to elevated regulatory uncertainty. New policy changes are threatening the individual exchange (2026) and Medicaid (2027) businesses. The market appears to be discounting companies with significant exposure to these businesses—like Centene, Elevance, and Molina—relative to their intrinsic value, which is creating an opportunity for long-term investors, in our view. Regulatory actions related to Medicare Advantage and vertical integration in the industry also remain possible. Cigna, CVS, Humana, and UnitedHealth appear most exposed and could eventually face potential fines and even forced separations in some scenarios.

BLANK PAGEFor more details on how each MCO 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.