Barclays ups CVS Health to Buy on positive margin outlook; shares rise

Investing.com — Barclays upgraded CVS Health Corp (NYSE:) shares to Overweight from Equal Weight, citing a promising outlook for the company’s margin recovery. The firm also raised its price target for CVS shares to $82 from $63.

The company’s shares rose around 2% in premarket trading Thursday.

Barclays highlighted the potential for CVS to achieve a significant margin recovery in its Medicare business, which could unlock substantial value at Aetna, CVS’s health insurance subsidiary.

The firm’s analysis suggests that CVS could reach the upper end of its 2025 Medicare margin improvement target, ranging from 100 to 200 basis points.

Analysts note that CVS demonstrated positive developments in its Medicare strategy over the past two weeks, with three important Medicare releases. They view these developments as an initial step toward a multi-year Medicare margin recovery.

Barclays’s 2025 EPS estimate for CVS is $7.80, which is 7% above the consensus estimates, bolstered by expectations of a conservative 200 basis points of Medicare Advantage margin improvement.

The investment bank also noted a reduction in member-weighted supplemental benefits for CVS, including dental, vision, hearing, and over-the-counter/flexible spending, which could contribute to margin improvement.

“Assuming underlying medical cost trend of 6-8%, we estimate 150-250 bps of margin improvement from supplemental benefits alone,” analysts said.

“Combined with plan exits (40 bps) and stars recovery (100 bps), we can easily tally more than 300 bps of margin improvement, which gives us greater conviction that CVS can achieve the high-end of its targeted margin improvement of 100-200 bps.”

Lastly, Barclays is also optimistic about CVS’s Pharmacy Services Segment (PCW), expecting share gains to counterbalance macroeconomic headwinds.

Over the next three years, Barclays believes CVS will aim to recover approximately 800 basis points in Medicare margin, starting from a -4% margin in 2024, alongside a $2 billion cost-savings plan.

It sees CVS potentially achieving 100 basis points of annual margin improvement in its Medicare Advantage business by 2026 and 2027. In addition, the analysts estimate CVS could achieve $500 million in annual cost savings over the next three years, totaling $1.5 billion, compared to the $2 billion target.

Based on these projections, Barclays estimates CVS’s 2027 earnings per share (EPS) could reach $9.83, which would be 9% (or $0.83) above current Street forecasts.