CVS Launches Strategic Review, Weighs Potential Breakup Of Business Units

(MENAFN- ValueWalk) With poor recent financial performance for the pharmacy, investors may be unclear on how to act

In the wake of a less-than-ideal second-quarter 2024 financial report, drugstore chain CVS health (NYSE:CVS) is weighing up whether to segment the firm into multiple entities.

CVS stock rose in the premarket hours Tuesday, signaling favorable investor sentiment toward the company's strategic review announcement. However, the CVS share price fell during the trading session and is still down substantially from its 2022 peak of more than $100.

Interestingly, and perhaps not coincidentally, the strategic review announcement comes on the heels of a report that hedge fund Glenview Capital Management is pushing for major changes at CVS. While I didn't find direct evidence that Glenview's influence prompted the planning of a strategic review, general investor restlessness could certainly be the impetus for a major CVS revamp and/or breakup.

To understand the context, we should check CVS's recent financial health as indicated in the company's second-quarter 2024 results. The good news is that CVS's revenue increased 2.6% from $88.921 million in the year-earlier quarter to $91.234 million in Q2 of 2024.

On the other hand, CVS's adjusted earnings declined 17.2% from $2.21 per share in the year-earlier quarter to $1.83 per share in this year's second quarter. Over the same time frame, CVS experienced similar decreases in its operating income and adjusted operating income.

For this unfavorable bottom-line result, CVS cited“continued utilization pressure” as a contributing factor. In effect, this means the firm had to pay out substantial claims from its Health Care Benefits segment because patients were heavily using that segment's services.

Adding to the market's consternation, CVS lowered its full-year 2024 adjusted EPS guidance from“at least” $7 to a range of $6.40
to
$6.65. In light of this, it's becoming clearer why Glenview Capital Management might push for changes at CVS and why a revamping of the company may be warranted.

Around the time of the announcement that Glenview Capital Management may pressure CVS to enact changes, The Wall Street Journal reported that CVS's board of directors is conducting a“strategic review” to weigh the company's options. Furthermore, Reuters confirmed that CVS's board is exploring a possible breakup of the company.

CVS took over healthcare insurance provider Aetna in 2017. However, if there's a business-unit breakup, CVS might separate or spin off its healthcare insurance unit from its core retail products unit.

It's too soon to determine how all of this will pan out. A CVS spokesperson opted not to offer comment to Reuters regarding whether the company is holding discussions to explore unit breakup options.

The uncertainty surrounding CVS's future makes it more challenging for informed investors to know what to do with CVS stock. Certainly, the company's downward-revised full-year EPS guidance should be a cause for concern.

In an August 11 note, TD Cowen analysts concisely summed up their issues with CVS's cloudy outlook:

While we view management's [...] adjusted EPS growth target for 2025 as attainable, we believe uncertainty around performance in 2024, as well as the outcome of CVS's 2025 Medicare Advantage bids, creates an unclear outlook for 2025 and beyond.”

TD Cowen analysts wrote that before the recent development, CVS could have ended up being split into multiple businesses. So now, there's an added element of uncertainty for CVS and its stakeholders.

That's why a neutral stance on CVS stock may be the most sensible for the time being. Hopefully, CVS's management will soon provide further clarity on the company's“strategic review”, how it expects to firm up its financials, and whether a business-unit breakup is in the works.

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