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CVS stock selloff feels 'overdone' - RBC

Published 24/05/2024, 10:04
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CVS
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CVS Health Corp. (NYSE:CVS) saw its shares slide more than 3% Thursday after an unconfirmed report from Bloomberg News that the healthcare company was seeking a private equity (PE) partnership in a bid to scale its Oak Street Health platform.

RBC Capital Markets analysts said they were “disappointed” with the “overdone sell-off.”

“The partnership model for de novo clinic development is not new, and in our view could represent a prudent strategy to protect credit ratings and liquidity, while shielding earnings from start-up losses as CVS builds scale in its primary care platform,” analysts said.

“We believe this strategy could allow CVS to defer a portion of clinic investment while the benefits business focuses on its multi-year path to Medicare Advantage margin recovery,” they added.

Per the report, CVS Health may pursue a partnership similar to Humana's with Welsh Carson. In this arrangement, CVS would initially take a minority interest in new clinics, with an option to purchase once they are established. Humana plans to open 150 centers by 2025, consolidating them after five years.

Comparatively, RBC believes Oak Street clinics will reach break even by year three or four and mature with $6-7 million in clinic-level profit by year six. This approach shields CVS from startup losses during the clinics' early years.

“The benefit of PE joint ventures is that CVS earnings are shielded from startup losses through de novos’ formative years,” analysts continued.

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