Should You Pick CVS Stock At $75 After A 6% Fall This Year?

CVS Health (NYSE: CVS) reported its Q4 results last month, with revenues and earnings beating the street estimates. The company reported revenue of $93.8 billion and adjusted earnings of $2.12 per share, compared to the consensus estimates of $90.4 billion and $1.99, respectively.  CVS stock has declined 6% this year, and we think it has ample room for growth from here. 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 $75 now, vs. an increase of about 35% for the S&P 500 over this roughly three-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 -15% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – 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 it has room for growth. We estimate CVS Health’s Valuation to be $88 per share, reflecting about 18% upside from its current price of around $74. Our forecast is based on a 10.5x P/E multiple for CVS and expected earnings of $8.35 on a per-share and adjusted basis for the full year 2024. The 10.5x P/E ratio aligns with the stock’s average over the last three years.

CVS Health’s revenue of $93.8 billion in Q4 was up 12% y-o-y, with sales growth across all segments. Looking at segments, Health Care Benefits sales increased by 16%, Health Services sales were up 12%, and Pharmacy & Consumer Wellness revenue was up 9%.  The company’s adjusted operating margin declined by 40 bps to 4.5% in Q4. This can partly be attributed to a 270 bps rise in medical benefit ratio (MBR) to 88.5%. This resulted in an adjusted profit of $2.12 per share, reflecting only a 4% rise from its $2.04 figure in the prior-year-quarter.

Looking forward, CVS expects its earnings to be in the range of $8.30 and $8.50 on a per share and adjusted basis in 2024, compared to $8.74 in 2023. This can primarily be attributed to higher expected medical costs. CVS Health should continue to benefit from increased healthcare services, prescription volume, pharmacy claims, and drug price inflation. However, medical costs are expected to remain on the higher side in the near term. Given that CVS stock is trading at under 9x forward earnings, lower than its historical average, we think investors can use this current dip for robust gains in the long run.

[1] Returns as of 3/7/2024
[2] Cumulative total returns since the end of 2016