Bernstein Out Bullish On CVS, Sees 40% Upside Potential For Stock

Bernstein is bullish on the prospects for CVS Health Corp (NYSE: CVS), notwithstanding the headwinds facing pharmacy benefit managers, or PBMs, given the likelihood that the bulk of prescriptions may ultimately move online.

The Analyst

Analyst Lance Wilkes initiated coverage of CVS Health with an Outperform and $76 price target, suggesting 41-percent upside.

The Thesis

Bernstein attributed its positive outlook to a low valuation, balanced near-term earnings growth and long-term prospects for Aetna and a care delivery at retail strategy.

CVS' stock price does not reflect Aetna's solid managed care organization business and the long-term value of a retail care delivery strategy, Wilkes said in the Tuesday initiation note.

That said, the valuation already reflects potential shocks to PBM margins and a future deterioration in the retail business, the analyst said. 

Bernstein expects 6-percent Aetna earnings growth, helped by 9-percent top-line growth and offset partly by margin compression from the mix shift.

Wilkes said he believes CVS/AET will have leading capability in value-based care, although he expects $10 billion of capital deployment to be made over the next five to seven years to build the capability.

CVS/Aetna is a likely long-term winner in healthcare, the analyst said. 

In the retail pharmacy business, Bernstein expects stable volume growth but compressed volumes as CVS runs both online and offline platforms.

For the PBM business, the firm forecasts flat earnings, although a downside scenario suggests a 40-percent decline in earnings.

The Price Action

CVS shares were trading up 3.92 percent to $56.80 at the time of publication Wednesday. 

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