CVS Health (CVS +2%) is looking to rebound today following a report that Glenview Capital, a significant shareholder, will meet with management to propose a new strategy to revitalize its operations. Shares of CVS have dropped 24% as of Friday's close. While this decline is less severe than Walgreens Boots Alliance (WBA, Financial), which has plunged over 65%, and Rite Aid, which filed for Chapter 11 bankruptcy last year, it still concerns investors facing stagnant growth and reduced guidance.
Glenview Capital's specific proposals remain undisclosed, but CVS must address several critical issues that could be part of these discussions:
- Health Care Benefits Segment: The departure of the Aetna President in August, less than a year after taking the position, highlights instability. Rising Medicare Advantage costs have caused CVS's medical benefit ratio (MBR) to jump by 340 basis points year-over-year in Q2. Aggressive membership expansion has halved operating margins.
- Glenview may focus on restoring margins. While CVS cannot control medical cost trends, it can adjust its offerings, including supplemental benefits and Part D, to alleviate margin pressures.
- Pharmacy Benefit Managers (PBMs): The FTC is suing CVS's Caremark Rx, among other PBMs, creating uncertainty. Despite this, CVS's Health Services segment remains high-margin, driven by acquisitions like Oak Street for $10.6 billion last year. Glenview might explore further opportunities in this segment but at a cost-effective pace due to CVS's debt from mergers and acquisitions.
- Retail Segment: CVS has seen declining front store volumes due to inflationary pressures. Competitors like Amazon (AMZN, Financial) may be attracting CVS shoppers, highlighting potential staleness and lagging technological advancements, including delivery services. CVS has announced store closures, similar to WBA, which is closing around 25% of its physical locations. Glenview may want to accelerate these plans.
Activist investor pressure is not new to CVS. Starboard Value took a stake in 2019 and engaged in talks with executives. Last month, hedge fund Sachem Head Capital disclosed a new stake in CVS. Despite the challenges, CVS's strong presence in retail and health care services suggests that significant changes could finally boost the stock.
