Does This New Development Make CVS Stock a Buy or a Sell?
With rumors swirling about CVS Health's (NYSE: CVS) new and ongoing discussions on how to turn around the company's sagging fortunes, it's natural for investors to wonder whether there's a new flurry of risks on the way, or there are whiffs of fresh opportunity in the air.
Management's final plan doesn't appear to be wrapped up just yet, but analyzing the challenges faced by the business -- as well as the actions that it's already taking -- should help to clarify whether this stock is more likely to be a buy or a sell in the near future. Let's dive in and see.
Will these proposed changes make CVS leaner, or just smaller?
In the past five years, CVS stock has achieved a dispappointing total return of just 14%, dramatically lagging the market's growth of 110%. So it's clear that shareholders have reason to be concerned, because there has been a disconnect between the company's strategy and its returns, especially since the start of 2023.
Excessive spending on corporate and managerial-level labor is one culprit that is being targeted. The company plans to let go 2,900 employees, most of whom work in corporate functions, in a bid to save around $2 billion in expenses annually.
Pharmacy-level labor costs are also a potential issue. Since at least last year, CVS has also been investing in automation technologies like robotics that could drive down labor costs at retail locations and distribution centers in the long term, in exchange for a bit more capital spending today.
But the bigger development -- at least, according to news reports -- is that it might be spinning off its health insurance segment, Aetna, into a separate business instead of being attached to the retail pharmacy and primary healthcare segments. CVS expects the insurance segment to account for up to $129.6 billion in revenue for 2024 out of an anticipated maximum total of $372 billion across the company, so a spinoff would represent a major reduction in the business' scope, perhaps with the benefit of increased operating profit.
A spinoff could also result in the remaining entity growing more slowly than the company is now. The insurance segment grew its top line by 21.4% in the second quarter compared to a year prior, reaching $32.4 billion, dramatically faster than any of the other segments. There simply isn't much reason to believe that consumers will be flocking to CVS to get their prescriptions in the future any more than they already are.
And while the primary healthcare segment could have faster growth than the pharmacy segment, it is still quite small in comparison, so it might not be enough to drive the top line upward for quite some time.
The upside is hard to see
Overall, the new announcement pushes CVS toward being a stock worth selling rather than buying. None of the newly announced changes will enable the company to transition into an actual strategy that can be expected to grow its stock faster than the market's average returns.
Furthermore, the planned cuts to corporate workers won't accomplish much in the big picture, though they will contribute to marginally higher earnings, assuming there isn't any efficiency or revenue lost by reducing the workforce.
For reference, its trailing-12-month operating expenses are just over $41 billion. In the last few years, that sum has ticked higher and higher regardless of whether its bottom line rose or fell versus the prior year, and there is nothing to suggest that the company can control those costs while continuing to grow the top line.
A turnaround is still entirely possible for CVS. It simply has too many valuable assets to write the stock off forever. Check back in a couple of years to see if its operational changes and the potential spinoff have started to make an impact -- it might be worth buying at that point.
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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.
Does This New Development Make CVS Stock a Buy or a Sell? was originally published by The Motley Fool