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CVS Stock Hits 50-Day SMA on Split Rumors: How Should You Play?
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CVS Health (CVS - Free Report) is mired in controversy these days. The company has been struggling with its performance for a while now, which resulted in a downside in shares. The company is once again in the headlines as it is reportedly considering a strategic restructuring of the business, which includes possible layoffs and potential breakups.
More specifically, earlier this week, news surfaced that the company might consider a disintegration of its verticals, which perhaps means divestment/spin-off of its Caremark pharmacy benefit management business or the Aetna health insurance business. Several articles claim that the company is considering these options under pressure from several investors who believe the breakup of its core wings might lead to a turnaround in its performance. The reports led to a 1.1% rise in the company’s shares, which closed at $62.24 yesterday on the fact that management is exploring possibilities to increase shareholder value through these initiatives.
Not just this, the stock, which was trading below its 50-day moving average for quite some time, broke above the resistance in the past few days, indicating the possibility of a further uptrend ahead.
50-Day SMA
Image Source: Zacks Investment Research
Will CVS Stock Continue to Rally?
Many of the investors are still skeptical about the entire scenario because this might have come on the heels of an FTC notice suing the PBM businesses of CVS Health, Cigna (CI - Free Report) and UnitedHealth (UNH - Free Report) for artificially inflating insulin drug prices. The PBM businesses of CVS, CI and UNH, namely Caremark Rx, Express Scripts and OptumRx, respectively, are recognized as the three largest in the market (comprising more than 80% of the market share).
FTC alleged that the three PBMs are engaged in anticompetitive and unfair rebating practices creating a perverse drug rebate system prioritizing high rebates from drug manufacturers, leading to artificially inflated insulin list prices. Accordingly, even when lower list price insulins became available that can be affordable for vulnerable patients, the PBMs systemically excluded them in favor of high list price, highly rebated insulin products.
YTD Price Performance
Image Source: Zacks Investment Research
The market speculates that, following this notice, several investors are pushing CVS Health to go for segment breakups. Wall Street Journal, in this regard, in its Sept. 30 article, claimed that a major hedge-fund investor met CVS Health management on Monday to propose ways of restructuring, including breakups and layoff of less than 1% of workforce. The article even directly named Glenview Capital as that hedge fund investor and stated that the meeting was fixed amid signs of several investors turning restless with the company’s ongoing drab performance.
Although Glenview Capital later denied pushing for a break-up of CVS Health’s businesses, it however admitted that CVS Health is currently operating well below its potential and has fallen short in its investment and actuarial approach in recent years. This is creating economic losses and volatility, putting pressure on people, customers and shareholders. This statement can be quite damaging from the perspective of investors who are currently hoping for the stock price to sustainably rebound any time soon.
The stock has witnessed a substantial 21.1% decline year to date, underperforming the Retail sector’s 19.6% growth and the S&P 500’s 20% rise. The only positive is that the broader industry also witnessed a sharp decline during this period, with the company’s direct peers Walgreens Boots (WBA - Free Report) and Herbalife (HLF - Free Report) registering 66.7% and 55.3% plunge, respectively.
Silver Lining
Bright 2025 Roadmap: The company is seeing accelerated opportunities from the integration of acquisitions like Signify and Oak Street into CVS Health assets. As per the latest data, Signify currently serves nearly twice as many Aetna members and till the end of the second quarter, the number of Aetna members at Oak Street clinics more than tripled. CVS Health currently expects this number to further expand in the 2025 annual enrollment period with the introduction of co-branded Aetna and Oak Street plans.
In June 2024, CVS Health submitted the bids for the 2025 Medicare Advantage plan. The company is currently confident about these bids being accepted, and the pricing for 2025 reflects prudent assumptions for utilization trends. This is expected to drive 100 to 200 basis points of margin recovery in 2025. This, according to CVS Health, will position it back to achieve its multi-year target margins of 4% to 5%.
Rapid Digital Growth: CVS is strategically investing in emerging technology capabilities such as voice, artificial intelligence and robotics to automate, reduce cost and improve the experience for its constituent businesses. The company has been removing barriers to digital adoption and making it easier for customers to access the services they seek, such as pharmacy refills and advanced scheduling for immunizations online. The company’s solid digital engagement and enhanced capabilities will strengthen its ability to drive seasonal flu and RFD immunization awareness and connect patients to the CVS locations for these important health services.
The company focuses on innovating and delivering experiences that matter most to customers, which is driving digital growth. In the second quarter of 2024, nearly 60 million unique customers utilized the CVS Health platform to schedule health services appointments, fill prescriptions and purchase wellness products, contributing to business growth. CVS Health sees tremendous opportunities to expand customer engagement across the organization through its multi-payer capabilities and vast consumer reach.
Expensive Valuation
In terms of valuation, CVS Health’s forward 12-month price-to-earnings (P/E) is 8.78X, a premium to the broader industry's average of 7.95X. The company is also trading at a significant premium to other industry players like Walgreens Boots (4.91X) and Herbalife (4.09X). This suggests that investors may be paying a higher price relative to the company's expected earnings growth. It also has a Value Score of A.
Image Source: Zacks Investment Research
Our Take
Thanks to several business-specific and industry-wide factors, the market has not been impressed with CVS Health this year. In addition to the ongoing controversy, the company has been grappling with a sudden increase in Medicare Advantage members’ utilization trend within the Health Care Benefits segment, where an increasing number of members are opting for health benefits.
The stock is currently positioned above its 50-day moving average. However, it is still much below its 200-day moving average. Accordingly, we cannot rule out the possibility of a resistance or pullback in share price going forward. Further, the current stretched valuation suggests that investors may be paying a higher price relative to the company's expected earnings growth.
Therefore, despite the recent dip in share prices, this might not be the ideal time to invest in CVS Health. In fact, those who already own this Zacks Rank #4 (Sell) stock may consider selling it, taking into account the company’s gloomy ongoing scenario.
Image: Bigstock
CVS Stock Hits 50-Day SMA on Split Rumors: How Should You Play?
CVS Health (CVS - Free Report) is mired in controversy these days. The company has been struggling with its performance for a while now, which resulted in a downside in shares. The company is once again in the headlines as it is reportedly considering a strategic restructuring of the business, which includes possible layoffs and potential breakups.
More specifically, earlier this week, news surfaced that the company might consider a disintegration of its verticals, which perhaps means divestment/spin-off of its Caremark pharmacy benefit management business or the Aetna health insurance business. Several articles claim that the company is considering these options under pressure from several investors who believe the breakup of its core wings might lead to a turnaround in its performance. The reports led to a 1.1% rise in the company’s shares, which closed at $62.24 yesterday on the fact that management is exploring possibilities to increase shareholder value through these initiatives.
Not just this, the stock, which was trading below its 50-day moving average for quite some time, broke above the resistance in the past few days, indicating the possibility of a further uptrend ahead.
50-Day SMA
Image Source: Zacks Investment Research
Will CVS Stock Continue to Rally?
Many of the investors are still skeptical about the entire scenario because this might have come on the heels of an FTC notice suing the PBM businesses of CVS Health, Cigna (CI - Free Report) and UnitedHealth (UNH - Free Report) for artificially inflating insulin drug prices. The PBM businesses of CVS, CI and UNH, namely Caremark Rx, Express Scripts and OptumRx, respectively, are recognized as the three largest in the market (comprising more than 80% of the market share).
FTC alleged that the three PBMs are engaged in anticompetitive and unfair rebating practices creating a perverse drug rebate system prioritizing high rebates from drug manufacturers, leading to artificially inflated insulin list prices. Accordingly, even when lower list price insulins became available that can be affordable for vulnerable patients, the PBMs systemically excluded them in favor of high list price, highly rebated insulin products.
YTD Price Performance
Image Source: Zacks Investment Research
The market speculates that, following this notice, several investors are pushing CVS Health to go for segment breakups. Wall Street Journal, in this regard, in its Sept. 30 article, claimed that a major hedge-fund investor met CVS Health management on Monday to propose ways of restructuring, including breakups and layoff of less than 1% of workforce. The article even directly named Glenview Capital as that hedge fund investor and stated that the meeting was fixed amid signs of several investors turning restless with the company’s ongoing drab performance.
Although Glenview Capital later denied pushing for a break-up of CVS Health’s businesses, it however admitted that CVS Health is currently operating well below its potential and has fallen short in its investment and actuarial approach in recent years. This is creating economic losses and volatility, putting pressure on people, customers and shareholders. This statement can be quite damaging from the perspective of investors who are currently hoping for the stock price to sustainably rebound any time soon.
The stock has witnessed a substantial 21.1% decline year to date, underperforming the Retail sector’s 19.6% growth and the S&P 500’s 20% rise. The only positive is that the broader industry also witnessed a sharp decline during this period, with the company’s direct peers Walgreens Boots (WBA - Free Report) and Herbalife (HLF - Free Report) registering 66.7% and 55.3% plunge, respectively.
Silver Lining
Bright 2025 Roadmap: The company is seeing accelerated opportunities from the integration of acquisitions like Signify and Oak Street into CVS Health assets. As per the latest data, Signify currently serves nearly twice as many Aetna members and till the end of the second quarter, the number of Aetna members at Oak Street clinics more than tripled. CVS Health currently expects this number to further expand in the 2025 annual enrollment period with the introduction of co-branded Aetna and Oak Street plans.
In June 2024, CVS Health submitted the bids for the 2025 Medicare Advantage plan. The company is currently confident about these bids being accepted, and the pricing for 2025 reflects prudent assumptions for utilization trends. This is expected to drive 100 to 200 basis points of margin recovery in 2025. This, according to CVS Health, will position it back to achieve its multi-year target margins of 4% to 5%.
Rapid Digital Growth: CVS is strategically investing in emerging technology capabilities such as voice, artificial intelligence and robotics to automate, reduce cost and improve the experience for its constituent businesses. The company has been removing barriers to digital adoption and making it easier for customers to access the services they seek, such as pharmacy refills and advanced scheduling for immunizations online. The company’s solid digital engagement and enhanced capabilities will strengthen its ability to drive seasonal flu and RFD immunization awareness and connect patients to the CVS locations for these important health services.
The company focuses on innovating and delivering experiences that matter most to customers, which is driving digital growth. In the second quarter of 2024, nearly 60 million unique customers utilized the CVS Health platform to schedule health services appointments, fill prescriptions and purchase wellness products, contributing to business growth. CVS Health sees tremendous opportunities to expand customer engagement across the organization through its multi-payer capabilities and vast consumer reach.
Expensive Valuation
In terms of valuation, CVS Health’s forward 12-month price-to-earnings (P/E) is 8.78X, a premium to the broader industry's average of 7.95X. The company is also trading at a significant premium to other industry players like Walgreens Boots (4.91X) and Herbalife (4.09X). This suggests that investors may be paying a higher price relative to the company's expected earnings growth. It also has a Value Score of A.
Image Source: Zacks Investment Research
Our Take
Thanks to several business-specific and industry-wide factors, the market has not been impressed with CVS Health this year. In addition to the ongoing controversy, the company has been grappling with a sudden increase in Medicare Advantage members’ utilization trend within the Health Care Benefits segment, where an increasing number of members are opting for health benefits.
The stock is currently positioned above its 50-day moving average. However, it is still much below its 200-day moving average. Accordingly, we cannot rule out the possibility of a resistance or pullback in share price going forward. Further, the current stretched valuation suggests that investors may be paying a higher price relative to the company's expected earnings growth.
Therefore, despite the recent dip in share prices, this might not be the ideal time to invest in CVS Health. In fact, those who already own this Zacks Rank #4 (Sell) stock may consider selling it, taking into account the company’s gloomy ongoing scenario.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.