Recent Dip in CVS Shares Presents Buying Opportunity, Analysts Say
The pullback in CVS Health's (CVS) - Get Report shares triggered by investor concerns over recent pharmacy benefits manager contract losses is "overdone," according to Jefferies analyst Mark Wiltamuth in a Wednesday note.
The stock has declined about 8% since hitting a year-to-date high of about $106 per share on May 10. CVS closed at $97 per share Wednesday, up 0.1% from Tuesday's close.
"As we estimate that these 3 contracts total $2.2B (only 1.5% of PBM revenues and $0.04 on a cons. $6.56 EPS base), we view the 8% selloff as overdone," wrote Wiltamuth, who has a buy rating on the CVS' stock and a $122 price target.
CVS over the past two months lost PBM contracts for California Public Employees' Retirement System, Texas Employees Retirement System and General Electric Co. (GE) to UnitedHealth Group's OptumRx, Wiltamuth wrote, adding that the contract losses "have sparked concerns over price competition in the 2017 PBM selling season."
"We continue to recommend CVS as a core holding," Wiltamuth wrote. He added that the company's leadership position in specialty pharmacy, two accretive deals and consistent execution "set it up well for 10-14% LT EPS growth."
Woonsocket, R.I.-based CVS in December completed its purchase of Target's (TGT) - Get Report pharmacy and clinic businesses for about $1.9 billion. In August, CVS wrapped up its purchase of Omnicare, a provider of pharmacy services to long term care facilities, for a total enterprise value of around $12.9 billion.
Wiltamuth views CVS as the "better risk/reward" than Walgreens Boots Alliance (WBA) - Get Report .
He wrote that though both companies have a 10 to 14% EPS growth outlook, "the two stories diverge significantly.
"We prefer the more predictable organic growth of CVS (with a boost from 2 accretive deals) to the double turnaround story at WBA (Walgreens U.S. and the pending Rite Aid merger)," he added.
In October, Walgreens unveiled a deal to buy Rite Aid for $17.2 billion. Walgreens CEO Stefano Pessina said on an earnings call last month that expected divestitures required to obtain Federal Trade Commission approval will be around 500 stores and the acquisition is expected to be completed by yearend.
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