Analysts at UBS have lowered their price target on CVS Health ahead of the pharmacy chain’s second quarter results, which will be handed down on Wednesday, August 2.
The analysts wrote in a note to clients that since CVS management’s last public commentary in May, negative peer news has emerged which has further muddied the outlook for CVS.
They pointed to UnitedHealth, Humana, Elevance Health and Centene Corporation reporting higher trends in Medicare Advantage (MA) outpatient utilization during May and June while commercial and Medicaid have been in line or better.
Additionally, Walgreens Boots Alliance reported poor retail margins and health results, lowering its guidance in late June, as UnitedHealth’s OptumCare segment missed on margins meaningfully, they also noted.
“All of these have potential negative read-throughs to CVS and we believe most investors are expecting a weak quarter, potentially driving a guidance cut for 2023 and perhaps 2024,” they wrote.
“The unknowns for 2024 include how much, if any, of other post-employment benefits (OSH) losses will be moved off the balance sheet; how CVS will fare when Stars ratings are updated in October; and how the company priced its 2024 MA book.”
Based on peer commentary and data, the analysts wrote that they were modestly lowering their second quarter and 2023 estimates for CVS.
They reduced their 2Q earnings per share estimate from $2.41 to $2.14 and their 2023 estimate from $8.51 to $8.40. For 2024 they now estimate EPS of $8.65, down from $8.78.
“We believe that if management does indeed lower expectations at or above our new estimates and provides visibility into the assumptions driving the estimates (key being OSH), we believe the stock should react well,” they wrote.
As such, they lowered their price target from US$94 to US$92 but awarded the stock a ‘Buy’ rating. CVS shares traded at US$73.80 on Tuesday afternoon.
“Our price target is based on a 9 time multiple (unchanged) on our estimated next 12 months earnings before interest, taxes, depreciation, and amortization (EBITDA) 12 months out, based on lower estimates and inclusive of the M&A related debt,” they explained.
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