Does this new development make CVS stock a buy or a sell?

With rumors swirling CVS Healthhis (CVS 2.65%) new and ongoing discussions about how to turn around the company’s faltering fortunes, it’s natural for investors to wonder if there’s a new flurry of risks on the way, or if there are aromas of new opportunity in the air.

Management’s final plan doesn’t appear to be finalized yet, but looking at the challenges facing the business — as well as the actions it’s already taking — should help clarify whether this stock is more likely to be a buy or a sell in the near future. Let’s dive in and see.

Will these proposed changes make CVS weaker or just smaller?

Over the past five years, CVS stock has delivered a disappointing total return of just 14%, dramatically lagging the market’s 110% rise. So it’s clear that shareholders have reason to be concerned, because there has been a disconnect between the company’s strategy and its returns, especially since early 2023.

Excessive labor costs at the corporate and managerial level is one culprit that is being targeted. The company plans to lay off 2,900 employees, most of whom work in corporate roles, in an attempt to save about $2 billion in expenses annually.

Labor costs at the pharmacy level are also a potential problem. Since at least last year, CVS has also invested in automation technologies such as robotics, which could reduce labor costs at retail locations and distribution centers in the long term, in return for slightly lower capital expenditures. big today

But the bigger development — at least according to news reports — is that it may spin off its health insurance segment, Aetna, into a separate business, rather than attaching it to its retail pharmacy and pharmacy segments. primary healthcare. CVS expects the insurance segment to account for as much as $129.6 billion in revenue by 2024 out of an anticipated peak total of $372 billion companywide, so a spinoff would represent a major downsizing of the field of business activity, probably with the benefit of increased operations. advantage.

A spin-off could also result in the remaining entity growing more slowly than the company is now. The insurance segment grew its top line by 21.4% in the second quarter from a year earlier to $32.4 billion, dramatically faster than any of the other segments. There simply isn’t much reason to believe that consumers will be flocking to CVS to get their prescriptions in the future any more than they already are.

And while the primary care segment might be growing faster than the pharmacy segment, it’s still pretty small in comparison, so it might not be enough to drive the top line for a period of time.

The upper part is hard to see

Overall, the new announcement pushes CVS to become a stock worth selling rather than buying. None of the recently announced changes will allow the company to transition to a real strategy that can be expected to grow its stock faster than the average market return.

Furthermore, the planned cuts to corporate workers won’t accomplish much in the big picture, although they will contribute to higher marginal gains, assuming no efficiency or revenue is lost by cutting the workforce.

For reference, its operating expenses for the past 12 months are just over $41 billion. Over the past few years, that amount has been rising more and more, regardless of whether its bottom line is up or down from the previous year, and there’s nothing to suggest the company can control those costs while continuing to grow the top line.

A turnaround is still possible for CVS. It simply has too many valuable assets to write off the stock forever. Check back in a few years to see if its operational changes and potential spin-off have started to have an impact – it might be worth buying at that point.