Is CVS Health Stock Undervalued At $70?

CVS Health (NYSE: CVS) reported its Q3 results earlier this month, with revenues and earnings beating the street estimates, and we believe that CVS stock is undervalued, as discussed below. The company reported revenue of $89.8 billion and adjusted profit of $2.21 per share compared to the consensus estimates of $88.2 billion in sales and $2.13 earnings per share. In this note, we discuss CVS’ stock performance, key takeaways from its recent results, and valuation.

CVS stock has seen little change, moving slightly from levels of $70 in early January 2021 to around $70 now, vs. an increase of about 20% for the S&P 500 over this roughly 3-year period. Overall, the performance of CVS stock with respect to the index has been quite volatile. Returns for the stock were 51% in 2021, -10% in 2022, and -27% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 15% in 2023 (YTD) – indicating that CVS underperformed the S&P in 2023.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Health Care sector, including LLY, UNH, and JNJ, and even for the megacap stars GOOG, TSLA, and MSFT.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could CVS face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a strong jump? From a valuation perspective, CVS stock looks undervalued. We estimate CVS Health’s Valuation to be $89 per share, reflecting about a 30% upside from its current price of around $68. Our forecast is based on a 10x P/E multiple for CVS and expected earnings of $8.55 on a per-share and adjusted basis for the full year 2023. The 10x P/E ratio aligns with the stock’s last five-year average. The company reiterated its 2023 earnings outlook in the $8.50 to $8.70 range.

CVS Health’s revenue of $89.8 billion in Q3 was up 11% y-o-y, with sales growth across all segments. Looking at segments, Health Care Benefits sales increased by 17%, Health Services sales were up 8%, and Pharmacy & Consumer Wellness revenue was up 6%.  CVS Health’s adjusted profit of $2.85 billion in Q3 2023 reflected a 1% decline from its $2.87 billion profit figure in the prior-year quarter. The company’s medical benefits ratio of 85.7% in Q3’23 increased by 230 bps. The adjusted profit of $2.21 per share was higher than the $2.17 figure in the prior year quarter, partly due to a 2% fall in total shares outstanding.

Looking forward, CVS Health should continue to benefit from increased prescription volume, pharmacy claims (excluding the COVID-19 vaccination), and drug price inflation. However, medical costs may remain on the higher side in the near term. CVS stock has seen a 27% fall this year, primarily due to a rating 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.

[1] Month-to-date and year-to-date as of 11/14/2023
[2] Cumulative total returns since the end of 2016

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