Is CVS Health Stock Undervalued?

CVS Health stock (NYSE: CVS) has seen a fall of 10% in a month, compared with -4% returns for the broader S&P500 index. The company reported upbeat Q4 results last month, with revenue and earnings well above our estimates. Still, CVS stock trended lower due to lower-than-expected guidance for 2024, when the company will face the impact of lower Medicare Star ratings. After its recent fall, we believe CVS stock is undervalued.

CVS Health’s revenue of $83.8 billion in Q4 2022 reflected a 9.5% y-o-y rise, with growth in all segments. Health Care Benefits and Pharmacy Services sales were up 11% y-o-y, while Retail sales were up 4%. The company benefited from a rise in Medicare and Commercial membership to 24.4 million by the end of 2022, compared to 23.8 million in 2021. Total pharmacy claims processed rose 3.1% in Q4, bolstering the sales growth for the Pharmacy Services segment. Its medical benefits ratio (MBR) also improved to 86%, vs. 87% in the prior-year quarter. However, its adjusted operating margin declined by 60 bps during the quarter.

The company has guided sales growth to be between 3% and 5% and its adjusted EPS to be between $8.70 and $8.90 in 2023. CVS will also benefit from its proposed acquisitions of Signify Health – a home healthcare services company – and Oak Street Health – a medicare focused primary care provider. However, CVS will likely see slower growth in 2024 due to medicare star rating headwinds. In October last year, CVS saw a downgrade in its most extensive health insurance plan for Medicare patients, with 1.9 million members. The reduced rating implies the plan’s ineligibility for performance-based bonus payments from the government in 2024. The company has guided EPS to be around $9.00 in 2024, rising to $10.00 in 2025, implying only a modest growth between 2022 and 2025. This did not sit well with the investors, as evident from stock performance in recent months.

But, looking at valuation, at its current level of $80, CVS stock is trading at just 9x its forward expected earnings of $8.83, compared to its last five-year average of 10x, implying that CVS stock is undervalued. We estimate CVS Health’s Valuation to be around $122 per share, reflecting a significant 52% upside from the current market price of $80. This represents a little over a 13x forward P/E multiple, higher than its historical average mentioned above. Given its transformation from a retail pharmacy to a broader healthcare provider, we have assigned a slightly higher multiple for CVS (vs. its historical average). Its new acquisitions will further strengthen its business and help expand its net margins, resulting in solid earnings growth beyond 2024.

While CVS stock is undervalued, in our view, it is helpful to see how CVS Health’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Target vs. Emergent Biosolutions.

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[1] Month-to-date and year-to-date as of 3/8/2023
[2] Cumulative total returns since the end of 2016

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