On October 4, 2024, TD Cowen upgraded CVS Health (NYSE: CVS) to Buy from Hold, raising its price target to $85 from $59.
This represents a potential upside of 35%, driven by significant updates to CVS’s Medicare Advantage (MA) business.
Analyst Charles Rhyee pointed to the company’s reduction of over-the-counter (OTC) benefits and a 27% year-over-year cut in dental allowances, which had previously driven medical utilization.
Additionally, 90% of members are now enrolled in four-star-rated plans for 2025, compared to 73% in 2024. Rhyee noted that 2024 could be the floor for CVS stock, with double-digit adjusted EPS growth expected in 2025.
According to Rhyee, CVS’s current price-to-earnings (P/E) ratio of 8.6x, combined with a 4% dividend yield, presents an attractive opportunity for value and income-focused investors.
TD Cowen’s upgrade reflects growing confidence in CVS’s ability to execute a turnaround and restore growth momentum, positioning the stock for substantial gains.
CVS Health: diverging analyst opinions
While TD Cowen is bullish, other analysts present a mixed view.
RBC Capital Markets has an Outperform rating and a $68 target, highlighting the potential for improvement depending on strategic execution.
On the other hand, Barclays holds an Equal Weight rating with a $63 target, focusing on the challenges facing CVS’s retail segment and suggesting that the integration of its payer/PBM assets remains crucial to its valuation.
CVS Health’s performance and restructuring efforts
CVS operates three primary segments: Health Services (which includes its Pharmacy Benefit Manager, Caremark), Health Care Benefits (Aetna), and Pharmacy & Consumer Wellness.
The company reported $357.8 billion in 2023 revenue, reflecting 11% year-over-year growth.
However, challenges persist in its Health Care Benefits segment, with lower-than-expected performance, particularly in its Medicare Advantage business.
The company’s Q2 earnings report revealed that revenue fell short at $91.2 billion, though non-GAAP EPS of $1.83 exceeded estimates.
The company has also embarked on a $2 billion cost-cutting initiative, including layoffs impacting 2,900 employees in corporate roles.
Additionally, CVS is reportedly considering strategic options, including potentially breaking up its business units, though no decisions have been finalized.
Hedge fund Glenview Capital, holding 1% of CVS’s shares, has been in discussions with management about enhancing shareholder value, further raising expectations for structural changes.
CVS Health stock: attractive valuation
CVS is currently trading at a 1-year forward P/E of 9.0x, a steep 31.2% discount to the sector median of 13.1x.
While the stock’s valuation suggests it is undervalued, the recent series of earnings downgrades have weighed on investor sentiment.
Despite these headwinds, the stock remains a strong income investment, with a dividend yield of 4.33%, making it appealing to long-term investors seeking income and stability in a volatile market.
A key issue for CVS is the profitability of its Medicare Advantage plans. The company’s medical benefit ratio (MBR) for Q2 2024 was 89.6%, reflecting higher-than-expected claims and increased costs.
CVS’s leadership expects a margin improvement of 100-200 basis points in 2025, but this is a downgrade from earlier expectations of a 200-point improvement.
These ongoing challenges have led to further concerns about the company’s ability to fully turn around its Health Care Benefits segment.
Despite pressures in its insurance business, CVS continues to generate substantial free cash flow.
In Q2 2024, CVS generated $8 billion in operating cash flow, which has allowed it to maintain its dividend commitment while managing a relatively high leverage ratio of 4x.
The company’s forward dividend yield of 4.6% remains attractive for investors seeking stable returns, while management continues to prioritize debt reduction and capital efficiency.
Regulatory scrutiny
CVS’s PBM business, Caremark, faces increasing scrutiny from U.S. lawmakers, particularly regarding concerns over anti-competitive practices.
Recent calls for investigations into co-manufacturing agreements could further complicate the regulatory landscape.
While this remains a significant concern, CVS’s strong positioning within the market and its diversification across multiple business lines may help cushion the impact of potential regulatory actions.
Looking ahead, CVS’s ability to improve margins in its Medicare Advantage business and execute its cost-cutting strategy will be key to realizing its growth potential.
The company’s bids for the 2025 Medicare Advantage plan are expected to improve profitability, setting the stage for a recovery in earnings.
If these initiatives succeed, CVS could see its stock appreciate significantly, aligning with TD Cowen’s revised price target.
Now, with these factors in mind, let’s take a closer look at the technical indicators to assess what the charts suggest about CVS’s stock trajectory moving forward.
CVS Health stock: bullish momentum emerging
CVS’s stock has seen a strong downward trend since the start of 2023 which lasts to this day and has seen it falling from above $100 to lows near $50.
Source: TradingView
However, the stock has been showing some stability since May and has been trading above its 100-day moving average over the past few days indicating bullish momentum developing in short-term charts.
Taking that into account, investors who have a bullish outlook on the stock can initiate a small long position at current levels and add to it further once it crosses above $68.3.
If the bullish momentum prevails, the stock can target levels above $80 soon.
Traders who are bearish on the stock must exercise some caution and should hold back from shorting it at current levels.
A fresh short position should only be considered if the stock again falls below its 100-day moving average.
The post Why CVS Health stock could appreciate 35% from here appeared first on Invezz
