Should You Pick CVS Stock At $55?

CVS Health (NYSE: CVS) has seen its stock fall around 4% in a week, aligning with the performance for its peer, Walgreens stock (NASDAQ:WBA). The CVS Health stock price fell after the company announced its second-quarter results, missing the revenue estimates and issuing lower-than-expected financial guidance for full-year 2024. It reported revenue of $91.2 billion and adjusted earnings of $1.83 per share, compared to the consensus estimates of $91.5 billion and $1.73, respectively. The company is facing pressure on its health insurance business, amid rising medical costs.

Amid the current economic scenario, CVS stock has seen little change, moving slightly from levels of $60 in early January 2021 to around $55 now, vs. an increase of about 40% for the S&P 500 over this period. Overall, the performance of CVS stock with respect to the index has been quite volatile. Returns for the stock were 55% in 2021, -8% in 2022, and -13% 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 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 looks like it has ample room for growth. We estimate CVS Health’s Valuation to be $66 per share, reflecting over 15% upside from its current price of around $56. Our forecast is based on a 10x P/E multiple for CVS and expected earnings of $6.61 on a per-share and adjusted basis for the full year 2024. The 10x figure aligns with the stock’s average P/E ratio over the last five years.

CVS Health’s revenue of $91.2 billion in Q2 was up 2.6% y-o-y, led by growth in Health Care Benefits, which saw a solid 21% y-o-y growth. The Pharmacy & Consumer Wellness segment saw its sales rise by 4%. However, Health Services revenue plunged 9%. This can be attributed to the loss of a large client and pharmacy client price improvements. The company’s adjusted operating margin declined by 90 bps y-o-y to 4.1% in Q2. This can partly be attributed to a 340 bps rise in medical benefit ratio (MBR) to 89.6%. The MBR metric was slightly below the street estimates. This resulted in an adjusted profit of $1.83 per share, reflecting a significant 17% fall from its $2.21 figure in the prior-year-quarter.

Looking forward, CVS has cut its outlook. It now expects its earnings to be in the range of $6.40 and $6.65 on a per share and adjusted basis in 2024, compared to its prior guidance of at least $7 per share. This takes into account higher anticipated medical costs in the second half of the year. Even though CVS stock is facing headwinds, it seems to have ample room for growth, in our view. At its current levels, CVS is trading at 8x forward earnings, compared to the last five-year average of 10x.

[1] Returns as of 8/14/2024
[2] Cumulative total returns since the end of 2016