BofA raises CVS stock outlook, flags Humana reserve concerns

On Wednesday, Bank of America analysts provided a mixed review of health insurance companies, showing a positive outlook for UnitedHealth Group (NYSE:UNH) and CVS Health (NYSE:CVS) regarding their reserve positions, while expressing concerns about Humana’s (NYSE:HUM) reserve strength. UnitedHealth, with its impressive $400 billion in annual revenue and "GREAT" financial health score according to InvestingPro, stands as the largest healthcare provider in the United States by market capitalization at $458 billion.

According to the analysts, UnitedHealth Group currently holds the strongest reserve positioning, with CVS Health not far behind. This marks a significant improvement for CVS, which was previously considered to have the weakest reserve positioning among its peers a year ago. The analysis suggests that the ability to maintain consistent reserve strength is challenging, given the fluctuating performance metrics used in the evaluation. UnitedHealth’s strong position is supported by its 33-year track record of consistent dividend payments and low price volatility, as noted in InvestingPro’s analysis, which offers 12 additional key insights about the company.

In contrast, the analysts noted that Humana, along with Elevance Health (previously known as Anthem), displayed the weakest reserve positioning. The analysis takes into account each company’s historical reserve levels. A company that was previously over-reserved and adjusts to an appropriate level may appear to have a weaker position than a company that was under-reserved and improves to the appropriate level, despite both ending up at the same point.

Elevance Health’s ranking dropped this year, despite being slightly above average last year, potentially explaining its current lower ranking. The analysts highlighted that while their analysis has historically been able to predict trends in reserve rolloff accurately, it is generally more effective at identifying companies that are under-reserved rather than over-reserved.

The commentary from Bank of America underscores the complexities involved in assessing the financial health and reserve positioning of insurance companies. It emphasizes the importance of historical performance and the challenges in maintaining a consistently strong reserve position. The outlook for CVS Health is particularly notable, as it has shown considerable improvement from its position a year prior. According to InvestingPro’s Fair Value analysis, UnitedHealth currently appears slightly undervalued, with comprehensive research reports available for deeper insights into the company’s financial position and growth prospects.

In other recent news, UnitedHealth Group has been in the spotlight following several significant developments. The company’s recent earnings and revenue results have not been highlighted, but analysts from Bernstein have pointed to UnitedHealth as a leading player in the value-based care (VBC) sector, expecting a recovery in this area by 2025. Deutsche Bank (ETR:DBKGn) maintained a Buy rating on UnitedHealth shares amid an update on a longstanding Department of Justice lawsuit. A special master recommended dismissing the case, which accused UnitedHealth of overbilling Medicare, due to insufficient evidence. Piper Sandler also reaffirmed confidence in UnitedHealth, maintaining an Overweight rating and a $600 price target despite recent concerns over Medicare Advantage risk adjustment coding. Additionally, UnitedHealth has included Vertex Pharmaceuticals (NASDAQ:VRTX)’ new non-opioid pain medication, Journavx, in its coverage, albeit at a higher cost tier. These developments reflect a mix of legal, strategic, and market activities surrounding UnitedHealth Group.

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