BMO: Potential Headwinds For CVS Cancel Out Valuation Advantage

CVS Health Corp CVS is trading at a discount to its historical level, rendering it attractive, but BMO Capital Markets is still wary of investing in the health care company and pharmacy chain. 

The Analyst

Analyst Matt Borsch initiated coverage of CVS with a Market Perform rating and $58 price target.

The Thesis

Despite CVS' low stock valuation and the upside potential in its long-term strategy, it faces multiple headwinds, Borsch said in the Wednesday initiation note. 

The company faces strong pressures across its businesses that have intensified, the analyst said.

Borsch is not fully convinced that CVS has reflected the impacts of the headwinds in its earnings guidance, adding that the business pressures are unlikely to subside or be mitigated to the degree expected in 2020. 

Some of the other issues at CVS are the integration of its recently acquired Aetna managed care business; refinement and initial implementation of HealthHUB; dealing with changes to the business model amid regulation and competitive pressures; and the PBM partnership with Anthem Inc ANTM, according to BMO. 

The analyst also pointed to the high debt load CVS assumed to finance the Aetna deal.

BMO is more positive on CVS, as it sees a potentially compelling long-term strategy in the unique combination of CVS businesses and the HealthHUB strategy.

The sell-side firm estimates 2019 earnings per share of $6.50, below the consensus estimate of $6.82.

The Price Action

Since the start of the year, CVS shares have lost over 17 percent.

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