CVS Health's Strategic Turnaround and Undervalued Growth Potential: A Convincing Case for Long-Term Investors

In the ever-evolving healthcare landscape, few companies have navigated the complexities of margin pressures, regulatory shifts, and consumer demands as effectively as CVS Health. The recent upgrade from UBS Group—from “Neutral” to “Buy”—with a raised price target of $79 (a 15% upside from its August 15 closing price) underscores a compelling narrative: CVS Health is not just stabilizing its healthcare benefits segment but actively repositioning itself as a high-conviction long-term investment. This upgrade reflects confidence in the company's operational execution, margin resilience, and strategic clarity, all of which align with a favorable valuation and robust growth trajectory.

Strategic Reinvention: From Margin Woes to Margin Momentum

CVS Health's healthcare benefits segment, led by Aetna, has been the cornerstone of its turnaround. For years, the segment struggled with underperforming Medicare Advantage (MA) contracts and volatile medical cost trends. However, 2025 has marked a turning point. Improved utilization forecasting, disciplined cost controls, and a shift in risk-adjustment methodologies have stabilized claims trends, unlocking reserve releases that contributed to a $1.91 billion adjusted operating income in Q2 2025—a $400 million year-over-year increase.

The company's decision to exit the individual Affordable Care Act (ACA) exchange business by 2026 is a strategic masterstroke. By allocating a $448 million premium deficiency reserve for 2025 losses, CVS has proactively mitigated risks in a low-margin, high-volatility segment. This allows the company to focus on its core strengths: Medicare Advantage, commercial plans, and Medicaid. Notably, Aetna's MA plans are now rated 4.5 stars or higher for 65% of members, well above the bonus threshold, ensuring regulatory tailwinds and fee-for-service growth.

Margin Expansion and Earnings Catalysts

UBS's upgrade hinges on the healthcare benefits segment's path to profitability. The firm estimates that repricing 50% of multi-year group MA contracts in 2025 could move the segment from negative mid-to-high single-digit margins to positive territory, adding $0.46 per share by 2026. This margin improvement, combined with disciplined pricing in commercial lines and automation-driven cost efficiencies, positions CVS to exceed Wall Street's 2026 EPS consensus of $7.15, with UBS projecting $7.20.

Moreover, the company's Medical Benefit Ratio (MBR) has improved by 310 basis points year-to-date to 87.3%, reflecting better cost management. While full-year 2025 MBR is expected to settle at 91.3%—a slight increase from 2024—this conservative approach signals prudence in a high-utilization environment. Analysts project 14% compound annual growth in EPS through 2028, outpacing the healthcare sector's 12% average.

Valuation Dynamics: A Discount to Intrinsic Value

CVS Health's current valuation offers a compelling entry point. At 9 times estimated 2026 earnings, the stock trades below its 10-year average of 10 times. This discount is particularly striking given its growth prospects and improving leverage profile. UBS anticipates leverage will drop to 3.5x by late 2026, freeing up capital for share buybacks and further EPS accretion.

The company's strategic investments in digital transformation—such as bundled prior authorizations for cancer scans and care navigation tools—also enhance its competitive moat. These innovations, coupled with its participation in the CMS Health Tech Ecosystem initiative, position CVS to lead in a value-based care model. The $20 billion, decade-long investment in interoperability and digital health tools aligns with broader industry trends, ensuring long-term relevance.

Risks and Resilience

No investment is without risks. Potential headwinds include regulatory shifts in drug pricing or pharmacy-benefit manager (PBM) reforms, as well as the October Medicare Star ratings update. However, UBS notes that CVS's strong Star positioning and proactive risk management mitigate these concerns. The company's conservative assumptions and focus on high-margin segments provide a buffer against volatility.

Investment Thesis: A Buy for the Long Haul

For long-term investors, CVS Health represents a rare combination of strategic clarity, margin resilience, and undervaluation. The UBS upgrade is not merely a reaction to short-term earnings beats but a recognition of the company's structural improvements in its healthcare benefits segment. With a path to $7.20 EPS by 2026 and a valuation that implies limited upside, the stock offers a margin of safety in a sector where growth is often priced in.

In conclusion, CVS Health's strategic turnaround—driven by operational discipline, margin expansion, and a refocused business model—makes it a compelling buy. While risks exist, the company's execution track record and favorable valuation dynamics justify a bullish stance. For investors seeking exposure to a healthcare company with both near-term catalysts and long-term durability, CVS Health is a name worth watching.