CVS Health Named Top Pick by Jefferies on Aetna Turnaround and Strong EPS Floor

Investment firm Jefferies has identified CVS Health as its top large-cap pick in the healthcare services sector, initiating a Buy rating and a $120 price target. The firm's analysis points to a clear earnings trajectory and a successful recovery in the company's insurance division following recent market dislocations.

Jefferies' Rationale

Jefferies' bullish stance is supported by several key factors outlined by CVS management. The firm highlighted the establishment of an $8.44 earnings per share (EPS) floor for fiscal year 2027, which provides a solid baseline for future growth with potential for upside.

Furthermore, Jefferies anticipates the resumption of share buybacks by late 2026 or early 2027, a move that would provide additional support for the stock. The firm also praised the company's disciplined bidding strategy for Medicare Advantage, which is expected to drive continued margin expansion at its Aetna insurance subsidiary.

Aetna's Recovery and Segment Strength

The turnaround at Aetna is a central component of Jefferies' positive outlook. The insurance unit generated approximately $2.4 billion in adjusted operating income in the second quarter with a medical benefit ratio of 87.4%. Year-to-date, Aetna has delivered over $2 billion in year-over-year operating income gains, signaling that its pricing and cost-management actions are effective.

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CVS's other segments are also showing strength. The Pharmacy & Consumer Wellness division saw same-store prescription volumes increase by 7% year-over-year in the second quarter. Jefferies noted this validates the company's CostVantage initiative, which uses cost-based contracts to improve reimbursement consistency.

Financial Health and Headwinds

While the Health Services segment faces headwinds into fiscal 2027 from 340B program pressures and membership declines at Caremark, Jefferies believes these challenges are already reflected in management's $8.44 EPS floor. These pressures are expected to be offset by growth in specialty prescriptions and improving economics in healthcare delivery.

CVS's financial position has strengthened, with $10.6 billion in operating cash flow generated in the first half of the year. This prompted management to raise its full-year 2026 guidance to over $11.5 billion. The company's leverage fell below 3.3 times in the second quarter, a development that prompted Moody's to revise its outlook for CVS to positive from stable.