CVS Health (NYSE: CVS), the largest U.S. pharmacy chain, has taken big steps toward financial recovery in 2025 and has seen its stock soar 76% year to date as a result.
But the prognosis from here isn’t clear. And keep in mind that even with this year’s surge, the stock is still down 21% combined over the past three years.
As for CVS’ makeup, it’s more than just pharmacies, which account for 35% of revenue. Health services, which include pharmacy benefit management (PBM) and direct healthcare services, such as clinics, account for 48%. Health care benefits, which include Aetna insurance, make up 35% of revenue. (The total is more than 100%, because CVS has an “other” category that’s negative 18%).
In recent years, the pharmacy unit has suffered from consumers gravitating online to order their drugs and other items that they might have purchased at CVS in the past. Healthcare services has suffered high from rising costs, Medicare regulatory changes and loss of PBM customers. Medicare is the government’s health benefit plan for the elderly.
‘One of the worst’
In the third quarter this year, CVS wrote down $5.7 billion of its $10.7 billion purchase of Oak Street Health, an operator of medical clinics servicing the elderly, in 2023. That ranks the acquisition as “one of the worst health-care deals in recent years,” writes Andrew Bary of Barron’s.
The healthcare benefits division suffered from the explosion of people getting medical treatment since Covid. That obviously means Aetna has to reimburse more patients and doctors. In addition, Medicare reimbursements haven’t matched the unit’s cost increases.
However, CVS is making progress addressing those problems, led by CEO David Joyner who took over in October 2024. Its revenue rose 7.8% in the third quarter from a year ago. Net income reversed from a profit of $87 million to a loss of $3.98 billion. But that includes the writedown of Oakstreet Health. Adjusted operating income increased 35.8%.
Much of the progress came in the healthcare benefits division. Its medical benefit ratio, which measures the percentage of premium revenue spent on medical benefits for the segment’s insured members, shrank to 92.8% in the third quarter from 95.2% a year earlier. Also, CVS is shuttering 16 of 246 Oak Street locations and won’t open any new ones next year.
Rosy outlook ahead
CVS sees good things ahead. It raised its forecast for full-year 2025 adjusted earnings to $6.55-$6.65 a share, up from its prior projection of $6.30-$6.40. And “a reasonable starting point for our 2026 adjusted EPS [is] mid-teens growth,” CVS CFO Brian Newman said in the earnings conference call last month.
But some experts believe further progress won’t be easy. “Potential regulatory pressures could constrain intermediate-term profits, due to potential declines in Medicaid and the individual exchanges, rising scrutiny in Medicare Advantage, and further PBM regulation,” writes Morningstar analyst Julie Utterback.
Medicaid is the health benefits program for lower-income people, “individual exchanges” refers to insurance exchanges, and Medicare Advantage plans are offered by private-sector insurers, such as Aetna. “CVS’ turnaround story may take many years,” Utterback said.
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