Investing.com — Barclays upgraded shares of CVS Health Corp (NYSE:) to Overweight from Equal Weight, citing promising prospects for the company's margin recovery. The firm also raised its price target on CVS shares to $82 from $63.
The company's shares rose about 2% in premarket trading Thursday.
Barclays highlighted the potential for CVS to achieve a significant margin recovery in its Medicare business, which could unlock substantial value in Aetna, CVS's health insurance subsidiary.
The company's analysis suggests CVS could meet the high end of its 2025 Medicare margin improvement target, which ranges from 100 to 200 basis points.
Analysts note that CVS demonstrated positive progress in its Medicare strategy over the past two weeks, with three major Medicare releases. They see these developments as an initial step toward a multi-year Medicare margin recovery.
Barclays' 2025 EPS estimate for CVS is $7.80, 7% above consensus estimates, driven by expectations for a conservative Medicare Advantage margin improvement of 200 basis points.
The investment bank also noted a reduction in member-weighted fringe benefits for CVS, including dental, vision, hearing and over-the-counter/flexible expenses, which could contribute to the margin improvement.
“Assuming an underlying medical cost trend of 6% to 8%, we estimate 150 to 250 basis points of margin improvement from fringe benefits alone,” the analysts said.
“Combined with plan departures (40 bps) and star recovery (100 bps), we can easily add over 300 bps of margin improvement, giving us greater conviction that CVS can reach the top end of “its objective of margin improvement of 100-200 basis points.”
Finally, Barclays is also bullish on CVS's pharmaceutical services (PCW) segment, expecting the stock's gains to offset macroeconomic headwinds.
Over the next three years, Barclays believes CVS will attempt to recover approximately 800 basis points in Medicare margin, starting from a -4% margin in 2024, along with a $2 billion cost savings plan.
It believes CVS could achieve 100 basis points of annual margin improvement in its Medicare Advantage business by 2026 and 2027. Additionally, analysts estimate CVS could achieve $500 million in annual cost savings over the next three years, for a total of $1.5 billion, compared to the Target of $2 billion.
Based on these projections, Barclays estimates that CVS's earnings per share (EPS) in 2027 could reach $9.83, which would be 9% (or $0.83) above current Street forecasts.
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