4. CVS Health Corporation (NYSE:CVS)
Number of Hedge Fund Holders: 77
CVS Health Corporation (NYSE:CVS) is a Woonsocket, Rhode Island-based diversified healthcare company that operates through various segments like pharmacy services, retail and long-term care segment, healthcare benefits, and corporate. The company is widely popular due to its extensive retail pharmacy chain CVS Pharmacy. In an update issued to investors following the company’s Q1 2023 results, Credit Suisse assigned CVS Health Corporation (NYSE:CVS) stock a target price of $96 along with an Outperform rating. The investment firm believes that the earlier-than-expected completion of the Oak Street deal will aid CVS Health Corporation (NYSE:CVS) in unlocking accelerated growth opportunities.
Here’s what Greenlight Capital said about CVS Health Corporation (NYSE:CVS) in its Q1 2023 investor letter:
“Second, we will discuss Oak Street Health (OSH), which we closed out after costing us 0.8% (net) during the quarter. CVS Health Corporation (NYSE:CVS) is buying OSH for $39 per share, or about $10 billion. When shorting, there is always the risk that someone with deep pockets will buy out the company at a silly price, or maybe even at twice a silly price. CVS is worth $115 billion (or it was the day they announced the deal; subsequently, CVS’s shares have fallen and it’s now worth $93 billion), so it can afford to piss away $10 billion.
OSH is in value-based care, which has become a trendy segment of the market. Most of the “value” comes from doing a more thorough and aggressive job of documenting how sick a patient is, so as to maximize Medicare payments. OSH operates 169 clinics (costing between $1.5-$2 million to build) in mostly lower income neighborhoods and employs 600 doctors. CVS projects that in 2026 the pro forma entity will have 300 clinics and “embedded EBITDA” of $2 billion, plus over $500 million of synergies.
In 2022, OSH generated less than $1 million of adjusted revenue per doctor2 and lost $500 million (almost $3 million per clinic). Even if it triples the number of doctors by 2026, it will need over $1 million of “embedded EBITDA” per doctor, implying margins shifting from a loss to nearly 100%. Obviously, this can’t happen, as the doctors need to be paid and there are other substantial costs. The amazing thing is that when rumors of this deal circulated, we reached out to CVS management and had a call where we walked them through the math… and they went ahead with the deal anyway. When the proxy came out, it revealed that OSH conducted an auction and, like a late-night eBay shopper who had one too many glasses of wine, CVS raised its uncontested bid several times… Rant over.”
