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Wall Street Appears To Love The Target-CVS Rx Deal

Wall Street Appears To Love The Target-CVS Rx Deal
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CVS Health Corp (NYSE: CVS) announced this morning that it is acquiring Target Corporation (NYSE: TGT)'s pharmaceutical business for $1.9 billion. The drug giant will operate the pharmacies within Target's 1,660 stores under the name "CVS Health" and pay Target rent for the space.

According to Wall Street analysts, the deal will yield benefits for both parties.

Morgan Stanley, Target Corporation

In a report published Monday, Joshua Siber called the "sale to CVS a positive," although he still rated the company Underweight.

According to Siber, the move is both financially and strategically smart. He says it allows Target to free up capital from a money-losing business, "refocus [managerial attention], and partner with a dominant pharmacy bran in CVS."

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Siber's calculations have revenues falling by $4.2 billion with the sale of the pharmacy arm, but he also expects EBIT dollars and margins to increase. Furthermore, he says the $1.2 billion in after-tax proceeds from the sale will be used to fund a share buyback.

CVS is better at running pharmacies than Target, says Siber, and it will likely be more successful in generating foot traffic than the old in-shop operations.

However, there is a chance that the plan could backfire. With over 7,800 CVS locations nationally, Siber wonders what will draw customers to the Target locations instead of the more numerous stand-alone pharmacies. "In our opinion, it is less likely that existing CVS customers will switch over to Target (unless TGT is truly more convenient) while we see it more likely that a TGT customer could seek out a CVS location."

There is also, he says, a concern over customer overlap. Siber believes that CVS and Target share a significant number of common customers—more common customers translate to less benefit for Target. However, he maintains that the deal should provide a substantial boost to Target traffic, at least initially, as the CVS brand wins the company increased market share.

Credit Suisse, CVS Health Corp

In a separate note, Credit Suisse analyst Edward Kelly raised his price target for CVS from $110.00 to $114.00, giving the health company a rating of Outperform. He calls the deal with Target a "smart strategic move."

He sees multiple reasons for optimism following the announcement. The acquisition of Target's in-store pharmacies provide CVS with enhanced scale at a time when Kelly says that scale is becoming increasingly important within the industry. He says that the sale will give CVS exposure in new markets and increased density in existing markets. According to Kelly, operating within Target stores should aid the company's drive to accumulate lives as the pharmaceutical sector continues to consolidate.

He notes that the partnership with Target is a more capital-efficient way of driving growth than opening 1,660 entirely new CVS locations.

Kelly sees the deal as a signal that the drug retail space is headed for accelerated consolidation.

Both Target and CVS share prices were trading up following news of the sale.

Latest Ratings for CVS

Dec 2016JefferiesAssumesBuyHold
Oct 2016UBSInitiates Coverage onBuy
Oct 2016BairdMaintainsOutperform

View More Analyst Ratings for CVS
View the Latest Analyst Ratings

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