Barclays: CVS Health's Valuation Doesn't Reflect Its Long-Term Strength

• CVS Health Corp CVS shares are down 7 percent in the last three months, even after trading above $105 on October 27.
• Barclays’ Meredith Adler reinstated coverage of the company with an Overweight rating and a price target of $110.
• Apart from a number of competitive advantages, the company has strong financial discipline and resources, Adler stated.

CVS Health has created an advantageous position for itself, analyst Meredith Adler said. He elaborated that this has been created by:

1. Being an early mover to acquire some of the most attractive assets in the industry, which have allowed the company to extend its PBM, long-term care and retail reach
2. Enjoying the lowest generic sourcing cost in the US, having entered into the Red Oak joint venture with Cardinal
3. Investing time and resources to create “an integrated approach to lowering the cost and improving the quality of patient care for employers, health plans and patients”

Adler pointed out that CVS Health’s assets and capabilities provide the company with “a starting point advantage,” which is boosted by management's experience and track record as well as their focus on leveraging the value of the combined enterprise.

“These competitive advantages are further strengthened by CVS's strong financial discipline and resources, including $41bn of cash available for investment, acquisitions, repurchases and dividends during the five years from 2014 to 2018,” the analyst wrote.

Adler believes that CVS Health's current valuation does not reflect the company’s long-term strength. He expects the company’s growth to accelerate in 2017, backed by accretion from Omnicare, improvement in Target's profitability, and a shift of “2016's new PBM contracts - primarily with health plans -- into a more profitable phase.”