Shares of retail pharmacy chain CVS Health (NYSE:CVS) only managed modest gains during Friday’s afternoon session, an unremarkable consolation following yesterday’s dramatic implosion. Sparking the downside was insurer Blue Shield of California, which disclosed that it would reduce reliance on CVS’ pharmacy business. Instead, it will work with other entities, including e-commerce stalwart Amazon (NASDAQ:AMZN). Subsequently, CVS stock is down 10% in the trailing five sessions.
According to Investopedia, CVS represented the primary pharmacy benefit manager (PBM) for Blue Shield. PBMs are third-party companies that function as intermediaries between insurance providers and pharmaceutical manufacturers, per the National Association of Insurance Commissioners. Moving forward, Blue Shield will use five different companies, which also include billionaire entrepreneur Mark Cuban’s Cost Plus Drug Company.
The core motivation for the move centers on “convenient, transparent access to medications while lowering costs,” according to the insurer’s press release. Notably, Blue Shield stated that it anticipates a full launch of its new system in 2025. Subsequently, the strategic pivot may save $500 million annually on drug prices.
To little surprise, other PBM providers — including Cigna (NYSE:CI) and UnitedHealth (NYSE:UNH) — also slipped on the development.
CVS Stock Faces Dark Clouds, but Many Experts Refuse to Panic
Given the seemingly ominous backdrop, analysts lowered their price targets for CVS stock, per a Barron’s report. In particular, RBC Capital Markets analysts lowered their per-share expectation of CVS to $91 from $102. However, the research arm of the financial firm still rated shares a “buy,” undergirding a common theme.
“We would be buyers of CVS and CI on today’s weakness,” said Mizuho analysts Anne Hynes and Dillon Nissan in a research note on Thursday. In discussing Blue Shield’s intentions to acquire more drugs from Amazon and other enterprises, the experts stated that they “are skeptical this model will gain widespread traction.”
Raymond James analysts led by John W. Ransom helped provide a more positive framing for CVS stock. “While we understand the knee-jerk market reaction, we do not think it’s likely that many other large organizations will follow Blue Cross of California in the short term until they see if this arrangement can actually deliver the proposed savings and avoid execution snafus,” they wrote to investors.
What may also help the cause for CVS stock is the value proposition. As of this writing, investment data aggregator Gurufocus notes that CVS carries a forward earnings multiple of 7.81X. In contrast, the sector median stat for the healthcare plans industry stands at a lofty 13.66X.
Ultimately, though, it’s a risky venture. In the trailing one-year period, CVS stock fell more than 35%.
Why It Matters
According to TipRanks, analysts peg CVS stock as a consensus strong buy. This assessment breaks down as 12 buys, three holds and zero sells. Moreover, the experts’ average price target lands at $94.50, implying over 41% upside potential.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
