Barclays Upgrades CVS Health to Buy on Positive Margin Outlook; Shares Increase

Barclays has upgraded CVS Health Corp shares from Equal Weight to Overweight, highlighting a positive outlook for the company’s margin recovery. The investment firm also increased its price target for CVS shares from $63 to $82.

Following this news, CVS shares experienced a rise of approximately 2% in premarket trading on Thursday.

Barclays pointed out that CVS has significant potential for margin recovery in its Medicare business, which could unlock considerable value for Aetna, CVS’s health insurance subsidiary. Their analysis suggests that CVS may achieve the upper range of its 2025 Medicare margin improvement target, which is between 100 and 200 basis points.

Analysts have observed positive advancements in CVS’s Medicare strategy over the past two weeks, noting three key Medicare releases. They believe these developments represent an important first step toward a multi-year recovery of Medicare margins.

Barclays’ earnings per share (EPS) estimate for CVS in 2025 is set at $7.80, which is 7% higher than the consensus estimates, driven by expectations of a conservative 200 basis points margin improvement in Medicare Advantage.

Additionally, the firm noted a decrease in member-weighted supplemental benefits for CVS, which include dental, vision, hearing, and over-the-counter/flexible spending options, potentially contributing to margin enhancement. Analysts estimate that with an underlying medical cost trend of 6-8%, CVS could see a margin improvement of 150-250 basis points from supplemental benefits alone.

They further elaborated that when combining plan exits (which could provide 40 basis points) and stars recovery (projected at 100 basis points), CVS could secure over 300 basis points in margin improvement, reinforcing their belief that the company can reach the higher end of its targeted margin increase.

Barclays is also optimistic about CVS’s Pharmacy Services Segment, anticipating that share gains will help mitigate macroeconomic challenges. Over the next three years, the firm believes CVS could recover about 800 basis points in Medicare margin, starting from a margin of -4% in 2024, in conjunction with a $2 billion cost-savings initiative.

The bank projects that CVS may achieve 100 basis points of annual margin improvement in its Medicare Advantage business by 2026 and 2027. Furthermore, it estimates CVS could realize $500 million in annual cost savings over the next three years, amounting to a total of $1.5 billion, compared to the targeted $2 billion.

Based on these forecasts, Barclays estimates that CVS’s EPS could reach $9.83 by 2027, representing a 9% increase (or $0.83) above current market expectations.