Tuesday, CVS Health (NYSE:CVS) stock received a reiterated Market Perform rating from Leerink Partners amid discussions of the company potentially exploring strategic alternatives, including a breakup. The firm addressed the various outcomes that could arise from such a move, emphasizing the uncertainty of the situation.
The analyst from Leerink Partners outlined potential benefits of a CVS breakup, noting that the retail segment has been underperforming, which could be dragging down the valuation of the Pharmacy & Consumer Wellness sector. By separating, the Caremark/Aetna segments might be able to strengthen their market position.
Additionally, Oak Street Health is still in a growth phase and could contribute positively to earnings before interest and taxes (EBIT) if investment were halted. Adjusting the company structure could also allow management to concentrate on areas of expertise.
Conversely, the analyst highlighted potential drawbacks, including the risk of customer attrition which is common in healthcare service disruptions, such as those seen with pharmacy benefit manager (PBM) mergers and managed care organization (MCO) consolidations.
The Maintenance Choice program, which offers flexibility for members to fill 90-day medication prescriptions by mail or at retail locations, could be compromised by a breakup. Furthermore, separating the business could incur significant initial costs to ensure each new entity is positioned for success.
The analyst also expressed concerns about selling the platform to new customers and the challenges a standalone retail pharmacy might face in terms of valuation and the loss of integrated value with the PBM.
The analysis provided by Leerink Partners does not predict the outcome of CVS's evaluation of strategic alternatives. Instead, it frames the potential impacts of a breakup, both positive and negative, on the company's future. The firm maintains a neutral stance with the Market Perform rating as the situation continues to unfold.
In other recent news, CVS Health is reportedly considering a strategic split of its retail and insurance operations, a move that could potentially unlock value within the company, according to Evercore ISI. The decision, which is still in an exploratory phase, could result in the creation of two distinct public entities. This deliberation comes amid CVS's recent financial adjustments, including a downward revision of its annual profit forecast.
Meanwhile, Glenview Capital Management has invested approximately $700 million in CVS, advocating for changes to improve the company's performance. CVS has also declared a quarterly dividend of $0.665 per share, emphasizing its commitment to return value to its shareholders.
In legal developments, the U.S. Federal Trade Commission has initiated action against CVS's Caremark, alleging manipulation of the market to favor higher-priced insulin drugs. These are recent developments in CVS Health's trajectory, as it navigates a complex healthcare and regulatory environment.
InvestingPro Insights
As CVS Health explores strategic alternatives, including a potential breakup, InvestingPro data provides additional context to the company's current financial position. CVS's market capitalization stands at $79.1 billion, with a P/E ratio of 11.13, suggesting a relatively low valuation compared to earnings. This could be relevant to the discussion of underperformance in certain segments and overall company valuation.
InvestingPro Tips highlight that CVS has maintained dividend payments for 54 consecutive years and has raised its dividend for 3 consecutive years. The current dividend yield is 4.23%, which may be an attractive factor for investors considering the company's stability amid potential restructuring. Additionally, CVS is noted as a prominent player in the Healthcare Providers & Services industry, underscoring its significant market position as discussed in the article.
The company's revenue for the last twelve months as of Q2 2023 was $361.86 billion, with a revenue growth of 7.03%. This growth, coupled with the InvestingPro Tip that analysts predict the company will be profitable this year, supports the ongoing discussions about CVS's financial health and potential for value creation through strategic alternatives.
For readers interested in a more comprehensive analysis, InvestingPro offers 11 additional tips for CVS Health, providing deeper insights into the company's financial outlook and market position.
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