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CVS Health (CVS) is trading sharply higher following an encouraging Q1 report that showed progress against its Aetna recovery plan. The company delivered a solid double-digit adjusted EPS beat, while revenue increased 6.2% yr/yr to $100.43 bln, also nicely above expectations. Encouragingly, CVS raised its FY26 guidance, now expecting adjusted EPS of $7.30-7.50, up from $7.00-7.20, while revenue is now expected to reach at least $405 bln, up from at least $400 bln.

• Health Care Benefits/Aetna showed improvement, with MBR improving 270 bps yr/yr to 84.6%, better than expected, while adjusted operating income surged 52.6% yr/yr to $3.04 bln. Revenue for the segment increased 3.3% yr/yr to $35.97 bln. CVS also raised its full-year Health Care Benefits adjusted operating income outlook to $4.0-4.34 bln.
• While encouraging, CVS still kept a prudent view on medical cost trends, noting it needs greater visibility into how trends develop. CVS still expects full-year MBR of 90.5%, plus or minus 50 bps.
• Health Services revenue increased 11% yr/yr to $48.24 bln, supported by pharmacy drug mix and brand inflation. Adjusted operating income declined 7.1% due to client price improvements, though rebate guarantee pressure is tracking in line with expectations. CVS also reaffirmed its full-year segment outlook.
• Pharmacy & Consumer Wellness was mixed, with revenue flat yr/yr and adjusted operating income down 8.8%, pressured by reimbursement, investments, softer seasonal illness, and weather disruption.
• Looking ahead, CVS viewed the final 2027 Medicare Advantage rate notice as a step forward, but still short of offsetting elevated medical cost trends. It will continue prioritizing margin over growth and reaffirmed its path to target MA margins by 2028.

Briefing.com Analyst Insight

While the medical cost backdrop remains choppy, this was an encouraging report for CVS and showed that internal execution is improving. Actions at Aetna, including membership and pricing discipline, improved product/geographic mix, and stronger medical cost management, helped drive a significant improvement in Health Care Benefits, with adjusted operating income up more than $1 bln yr/yr. The MBR also improved nicely. Additionally, the raised full-year guidance and operating income for Health Care Benefits and Pharmacy & Consumer Wellness suggest the improvement is extending. It will be important to watch how Aetna's recovery actions, rebate guarantees, client pricing, and pharmacy reimbursement pressure continue to impact results, especially with medical cost trends still expected to remain elevated. Overall, the backdrop is still choppy, but CVS is executing well and making progress against its recovery plan.