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On Wednesday, Morgan Stanley reiterated its Overweight rating on CVS Health (NYSE:CVS) shares with a steady price target of $65.00. The firm's analysis suggests that CVS Health's stock has a slight upside potential, despite uncertainties surrounding the company's future structure. This comes after speculation that CVS may consider dividing its retail and insurance businesses.
The analyst from Morgan Stanley provided insights into a hypothetical sum-of-the-parts (SOTP) valuation, which could imply a base case share price of $66, indicating a modest rise from the current price target and market value. This analysis follows unconfirmed reports that CVS's Board is evaluating options for a potential breakup of the company's retail and insurance segments. However, CVS has not issued any statements confirming such plans.
The Morgan Stanley assessment acknowledges various risk factors that could impact CVS Health, including challenges in the Medicare Advantage margins, regulatory pressures, retail competition, and the execution of cost-saving strategies. Despite these potential headwinds, the firm believes that the current stock price, trading at 8.5 times the projected 2025 earnings per share, already reflects these risks.
The analyst also discussed the possibility of CVS Health splitting off its retail pharmacy business. While such a move might offer some strategic advantages, like simplification and the removal of persistent concerns, it would not be a comprehensive solution to the challenges facing the remaining company components. The report suggests that CVS might ultimately decide to maintain its current integrated structure while keeping its options open for future changes.
Looking ahead, Morgan Stanley anticipates further updates from CVS Health, particularly regarding Medicare Advantage Star ratings, which could provide additional information on the company's performance and strategic direction.
In other recent news, CVS Health has been the focus of multiple developments. The company announced the layoff of approximately 2,900 employees as part of a cost-saving initiative. CVS Health also revealed new Medicare Advantage plans featuring a $0 monthly premium on prescription drugs.
Amid these changes, Mizuho maintained an Outperform rating for CVS Health, despite speculations about a potential split of its retail pharmacy and insurance units. The firm expressed skepticism about such a separation, citing the significant revenue synergies between CVS's retail operations and its pharmacy benefit manager.
Leerink Partners also shared their analysis on the potential split, highlighting both the potential benefits and drawbacks. CVS Health is also facing legal action from the U.S. Federal Trade Commission over alleged market manipulation. These are all recent developments in the company's trajectory.
InvestingPro Insights
To complement Morgan Stanley's analysis, InvestingPro data offers additional insights into CVS Health's financial position. The company's P/E ratio of 10.87 and Price to Book ratio of 1.03 suggest that the stock may be undervalued, aligning with Morgan Stanley's view of potential upside. This is further supported by CVS's robust revenue of $361.86 billion over the last twelve months, with a 7.03% growth rate.
InvestingPro Tips highlight CVS's strength as a dividend payer, having maintained dividend payments for 54 consecutive years and raised them for the past 3 years. The current dividend yield stands at an attractive 4.32%. These factors may provide some stability for investors amidst the uncertainties surrounding the company's structure.
Another InvestingPro Tip notes that CVS is a prominent player in the Healthcare Providers & Services industry, which could be relevant to the discussion of potentially splitting the company's retail and insurance businesses. The tip suggesting that CVS trades with low price volatility might be reassuring for investors considering the current speculations about the company's future.
For readers interested in a deeper analysis, InvestingPro offers 5 additional tips that could provide further context to CVS Health's financial situation and market position.
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