A billionaire investor is calling for changes at CVS. Is now the time to buy the stock?

Billionaire investor Larry Robbins of hedge fund Glenview Capital Management has taken a large stake in the healthcare company CVS Health (CVS 2.65%) and met with management about ways to help turn around the struggling business. Conformable The Wall Street JournalGlenview raised about $700 million from the company.

Meanwhile, according to CNBC, CVS met with advisers to conduct a strategic review of its business. The review began before Glenview was involved.

The question is: With a billionaire investor taking a big stake in CVS, should other investors follow suit?

CVS fights

CVS has three core businesses: healthcare benefits, a retail pharmacy, and a pharmacy benefit manager (PBM). All businesses have had their share of struggles.

The health care benefits business, which includes health insurer Aetna, has struggled due to higher health care costs and utilization. The medical benefit ratio (MBR), a measure of claims to premiums earned, rose 340 basis points last quarter to 89.6%.

In short, the higher the number, the less money the company keeps. Health insurance providers must pay 80% of premiums for healthcare costs and quality improvement activities, and 85% if they sell to large groups of 50 or more employees.

CVS attributed the large increase in its MBR last quarter to higher Medicare Advantage use, lower star ratings and increased Medicaid acuity (severity of illness). The Stars system is based on quality of care and is used to determine Medicare bonus payments. The higher MBR led the segment to post a 39% decline in adjusted operating income despite a 21% increase in revenue and 5% growth in membership.

The company also updated its guidance to reflect current medical cost trends, which it said could be higher than in the first half of the year. It said if that happens it could be forced to take a premium deficiency reserve in its Medicare business, meaning current payment reserves and future premiums won’t be enough to pay unpaid claims and claims future It now expects its MBR to be 90.6% to 90.8% for the full year, up 80 basis points to 100 basis points from previous guidance.

The retail pharmacy business has also been under pressure from reimbursement rates. This has been an industry-wide problem as PBMs have relentlessly pushed reimbursement rates to the point where pharmacies are losing money filling prescriptions. CVS owns the largest PBM in Scripturi Express, so it hasn’t seen the same kind of effect as its rival Walgreens Boots Alliance.

However, adjusted second-quarter segment revenue fell 12% despite a 4% increase in revenue and a 4% increase in subscriptions being filled.

CVS’s PBM segment was the best performing of its businesses. It posted a slight 1% increase in adjusted operating income despite the loss of a large client, which caused segment revenue to decline by 9% and receivables processed by 18%.

Image source: Getty Images.

Recovery potential

The company will have an opportunity to fix Aetna’s business with better underwriting when it revalues ​​the business next year. It seems he understated his policies this year to win new business, which turned out to be a mistake. CVS said there will be significant price increases in 2025 for individual companies, while for Medicaid, price increases will take effect on nearly half of its book at the start of the year. In general, this problem should be solved in time.

Meanwhile, the retail pharmacy and PBM businesses are intertwined in many ways. After all, it’s PBMs like the company’s Express Scripts business that are causing reimbursement pressures on pharmacies. Ultimately, there will need to be a more sustainable model for pharmacies. But if that happens, how much benefit the company as a whole will reap is uncertain, given that it owns both a large retail pharmacy and a PBM.

At this point, I think the company is favoring reimbursement pressure to the benefit of its PBM and to the detriment of pharmacies, as it hurts its rivals more and they reduce their store count. As a result, CVS has already taken pharmacy share, and that will likely only increase as Walgreens closes stores.

From a valuation perspective, the stock is cheap, trading at about 8.4 times forward price-to-earnings (P/E) based on analyst estimates in 2025. This falls between a health insurer like Humane and struggling Walgreens Pharmacy.

CVS PE (forward 1y) ratio data by YCharts.

The valuation gap between health insurers and pharmacies could make it interesting for the company to grow Aetna’s business, where it should be able to command a higher multiple. Regardless, it appears there are levers the company can pull to help turn the business around and create shareholder value going forward.

I think investors can watch Glenview in the name and be buyers of CVS stock.