Will CVS Stock Rebound To Levels Over $100 Seen In 2022?

CVS Health stock (NYSE: CVS) currently trades at $58 per share, 47% below its pre-inflation shock high of $110 seen in February 2022. In contrast, its peer – Walgreens stock (NASDAQ:WBA) – is down 75% over this period, amid falling profitability. CVS stock was trading at $93 in early June 2022, just before the Fed started increasing rates, and is now 37% below that level, compared to 45% gains for the S&P 500 during this period. This underperformance of CVS stock can be attributed to declining margins, amid higher medical costs. Returning to the pre-inflation shock level of $110 means that CVS stock will have to gain 90% from here, and we don’t think this will materialize anytime soon. Our detailed analysis of CVS Health’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

The decrease in CVS stock has been far from consistent. 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 only 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 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 recovery? From a valuation perspective, CVS stock looks it has room for growth. We estimate CVS Health’s Valuation to be $72 per share, reflecting over 20% upside from its current price of $58. Our forecast is based on a 9x P/E multiple for CVS and expected earnings of $7.72 on a per-share and adjusted basis for the full year 2024. The 9x P/E ratio is slightly lower than the stock’s 10x average over the last five years.

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
• April 2021: Inflation rates cross 4% and increase rapidly.
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P500 recoup some of its losses.
• Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession, and it is prepared for rate cuts in 2024 and 2025.

In contrast, here’s how CVS stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

CVS and S&P 500 Performance During 2007-08 Crisis

CVS stock saw a 30% decline between August 2008 (pre-crisis peak) and March 2009 (as the markets bottomed out). It surged post the 2008 crisis to levels of around $32 in early 2010, rising about 25% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

CVS Fundamentals And Financial Position

CVS Health’s revenue rose from $292 billion in 2021 to $361 billion in the last twelve months, led by increased prescription volume, pharmacy claims, and drug price inflation. The company’s operating margin fell from 5.2% in 2021 to 3.6% now, as the post-pandemic period resulted in increased medical costs. Its trailing earnings per share of $5.70 compares with $5.95 in 2021.

Looking at the company’s financial position, CVS’ total debt rose from $76 billion in 2021 to $82 billion now, while its cash remained around $13 billion. The company also garnered $11 billion in cash flows from operations in the last twelve months. A debt-to-equity ratio of around 110% indicates that the firm’s financial position is not robust.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe CVS stock has the potential for more gains once fears of a potential recession are allayed. That said, higher medical costs remain a key risk factor for CVS in the near-term. In fact, CVS cut its outlook for the full-year. It expects its earnings to be in the range of $7.00 and $8.30 on a per share and adjusted basis in 2024, compared to $8.74 in 2023 and its outlook of $8.30 to $8.50 at the beginning of the year. This can primarily be attributed to higher expected medical costs. Overall, we don’t think that CVS will rebound to over $100 levels anytime soon, but from a valuation perspective it does look attractive, trading at 7.5x forward expected earnings, versus a 10x average P/E over the last five years.

While CVS stock may see higher levels, 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.

[1] Returns as of 6/28/2024
[2] Cumulative total returns since the end of 2016

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