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CVS Turnaround Plan May Be 'Good Enough,' But Timeline Is The Question

Dave Royse

CVS Health Corp (NYSE: CVS) laid out its ideas for growing earnings growth from the low single digits expected next year, giving analysts a look at a plan that includes a turnaround in its retail long-term care business, growth at its acquired health insurer Aetna and faster-than-expected ramp up of HealthHUB stores.

Expanding HealthHUB

CVS announced ahead of its investor day on Tuesday that it will open 1,500 HealthHUB stores by the end of 2021. The locations are similar to drug stores, but focused more on health services and some health products, without all the chain drugstore standby products like greeting cards and snacks. The company already has opened three locations in Houston. CVS says it will follow the Houston test market for HealthHUB with three more markets this year.

CVS’s performance improvement plan presented to analysts includes $900 million in synergies at newly acquired Aetna by 2021, and more than $1.5 billion in savings from modernization by 2022.

“Aetna appeared as the most positive business with earnings up high single digits, largely driven by Medicare growth,” Wells Fargo analyst Peter Costa wrote in a note. Costa rates CVS at Market Perform with a $62 price target.

CVS also told analysts its Omnicare long-term care business is stabilizing. The company gave an initial outlook for EPS of at least $7 in 2020 and expects faster growth beyond 2020.

Guidance: Good Enough

While the guidance for 2020 was below consensus, it was “good enough,” said Morgan Stanley’s Ricky Goldwasser, who has an Overweight rating and a $74 price target on the drugstore chain.

CVS offered a bit of a surprise with its confidence in retail reacceleration, Goldwasser said. The company is banking on preferred network agreements, a better product mix, and a turnaround in the company’s long-term care pharmacy services provider, Omnicare.

The turnaround plan at the pharmacy chain does have “a lot more meat on the bone,” noted UBS Global Research analyst Kevin Caliendo.

He said the question, though, is “can investors wait until 2021 to eat?"

Price Reform?

“We suspect investors will wait to see how drug pricing reform shakes out this summer before increasing risk,” Caliendo wrote Wednesday. He continues to have a $67 price target on CVS, and rates the stock a Buy.

Baird Equity Research analyst Eric Coldwell also said the steeper growth curve than expected will keep the Street reluctant.

“There is a lot of hard work ahead to execute on this plan and environmental headwinds remain stiff,” wrote Coldwell, who has a Neutral/Higher Risk rating and a $63 price target on the stock. “With sentiment awful, we wouldn’t be surprised if stock continued to rally modestly on heels of the event. But, 2018-2021 EPS are all implied with a $7-handle. We don’t see a rush to get involved.”

Shares of CVS were down 2.4 percent to $53.31 at time of publication Wednesday.

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Photo courtesy of CVS Health.

Latest Ratings for CVS

Date Firm Action From To
May 2019 Maintains Buy Buy
Apr 2019 Maintains Overweight Overweight
Apr 2019 Maintains Strong Buy Strong Buy

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