CVS Health: Seizing Opportunity Amid Recent Declines (NYSE:CVS) (2024)

Summary

CVS Health Corporation (NYSE:CVS) is scheduled to report its Q1 earnings on May 1st, 2024. Analysts estimate revenue to come in around $89 billion and EPS of $1.70. Over the last 2 years, CVS has beat on both the top- and bottom-lines as management has delivered on most of its promises.

However, despite 8 consecutive quarters of beating expectations, CVS's share price has not performed well. Since April 2022, shares have declined considerably relative to the S&P 500 (SP500). Rising costs, increasing competition, potential government policy changes, and a large amount of debt are just some of the reasons why Wall Street remains cautious around CVS. However, at a certain point, a stock can become too cheap to ignore, and I think that's the case here.

One of the primary reasons to consider CVS as a buy now is its discounted valuation based on numerous financial metrics, including price-to-earnings ratio (P/E), price-to-sales (P/S), and continued revenue growth. Year-to-date (YTD), the stock price of CVS has experienced a decline of 13%, significantly underperforming the broader market represented by the S&P 500, which has seen an 8% increase over the same period. This divergence presents an opportunity for investors to acquire CVS shares at a reduced price relative to its intrinsic value, potentially unlocking substantial upside as the market recognizes its true worth.

CVS YTD Performance vs. S&P 500

As you can see above, CVS has underperformed the broader U.S. equity market by almost 20% at the time of writing. Most of the decline has occurred since the start of April. A lot of the recent decline can be attributed to Humana Inc.'s (HUM) announcement around a lower than expected payment increase for Medicare Advantage Plans. Many investors fear this will possibly lead to earnings revisions across the industry, including CVS.

However, the 3.7% average payment increase for Medicare Advantage plans is the same that had been proposed by the U.S. government in January. Wall Street was just expecting higher numbers. In my view, the recent decline may now have priced in the appropriate payment increase. As things stand now, CVS is still trading a single digit P/E ratio of only 8.3x next year's earnings. This is still well below its competitors (ex-Walgreens Boots Alliance) as seen below:

CVS Forward Price-to-Earnings (P/E ratio) vs. Competitors

And while it trades at a much lower P/E multiple, CVS's revenue growth is relatively in line with competitors Cigna (CI) and UnitedHealth Group (UNH).

CVS Quarterly YoY Revenue Growth vs. Competitors

Taking it a step further, we can view another key financial metric, the price-to-sales ratio. It shows CVS is much lower relative to CI, HUM, and UNH. Another indicator that it may be undervalued.

CVS Price-to-Sales (P/S Ratio) vs. Competitors

In terms of net profit margins, CVS also remains in the middle of the pack. It is much better than Walgreens' (WBA) negative margin, but is still slightly below HUM and CI.

CVS Net Profit Margin vs. Competitors

While observing these financial metrics is helpful, at the end of the day, all that matters is if CVS can deliver on the below promises made for 2024. With its strategic pivot towards diversified healthcare services and innovative initiatives like health hubs, CVS appears poised to deliver robust revenue and profit growth for full-year 2024. By capitalizing on emerging trends in the healthcare industry and leveraging its integrated platform, CVS is well-positioned to exceed expectations and create significant value for shareholders.

If CVS can deliver on its $8.30 promise, it would be possible to see its P/E multiple trade closer to its historical averages above 10x. Even at a conservative 10x multiple, that would imply CVS should trade at $83/share. This implies 18% from its current share price at the time of writing.

Risks and Conclusion

If management can continue to deliver on its guidance, I believe eventually Wall Street will reward shareholders. While CVS presents promising opportunities, investors should remain vigilant of several risks. Regulatory changes in healthcare policies could impact reimbursem*nt rates and profit margins, while intense competition from traditional rivals and emerging disruptors may challenge market share. Additionally, macroeconomic factors, such as economic downturns or changes in consumer behavior, could affect demand for CVS's services and products, posing potential risks to its financial performance and stock price. These are tough risks to forecast as an investor. Overnight, things can change from a regulatory perspective, and I believe that's a big reason for the cheap valuation.

The recent decline related to Medicare Advantage price increases is short-term noise in my view. The long-term picture has not changed for CVS Health Corporation, and it should not be viewed any different as an investor. The company is becoming a health care conglomerate giant that has the potential to generate stable revenues and profits for years to come.

Reality Check Research