Morningstar

CVS: Lowering Fair Value Estimate as Firm Splits

Transparency concerns around vertical integration appear to be a key driver of this split.

The CVS logo seen on a cart.
CVS
Securities in This Article
CVS Health Corp
(CVS)

Key Morningstar Metrics for CVS Health

  • Fair Value Estimate
    : $104.00
  • Morningstar Rating
    : ★★★★
  • Morningstar Economic Moat Rating
    : None
  • Morningstar Uncertainty Rating
    : High

On Nov. 4, CVS Health CVS announced plans to split into two publicly traded companies in early 2028. CVS Health will comprise the firm’s medical insurance, pharmacy benefit management, specialty, and caregiving operations, while CVS Pharmacy will include its retail pharmacy and other medication dispensers.

Why it matters: Transparency concerns around vertical integration appear to be a key driver of this split, as CVS’ top-tier PBM and retail pharmacy chain were in the crosshairs of some regulators and contributing to client losses.

  • On the regulatory front, some states (Arkansas and Tennessee) were already seeking to split PBMs from retail pharmacies. Also, federal legislators have been working on similar efforts to split insurance assets from medication dispensing and caregiving assets.
  • While we suspect the vast majority of CVS’ intrinsic value will stay in the hands of shareholders, a potential spinoff faces some financial consequences, like the potential for lost synergies and new corporate stand-up costs, which adds some uncertainty to the situation.

The bottom line: To recognize those potential financial consequences, we are trimming our fair value estimate by 5% for no-moat CVS to $104 per share from $110 previously. Shares fell over 10% in early Nov. 4 trading, and the stock will likely remain moderately undervalued.

  • Positively, this split may remove some regulatory risks and open discussions with clients that may have been concerned about the incentives of the combined entity. Our Uncertainty Rating for CVS remains High for now, but it may decline to Medium once this split is completed and those risks dissipate.
  • At first glance, we suspect CVS Pharmacy will likely retain a no-moat rating, if we follow it, but the CVS Health operations look stronger, probably on the edge of narrow territory.

Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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