Should You Buy CVS Stock At $70?

CVS Health stock (NYSE: CVS
CVS
) is down 5% in a month, underperforming the broader markets, with the S&P500 down 1%. Although the company posted upbeat Q1 results late last month, the stock has declined due to revised lower guidance for the full year. Still, we believe that CVS stock is now undervalued, as discussed below.

CVS Health’s revenues were up 11% to $85.3 billion in Q1’23, compared to our forecast of $80.8 billion. Health Care Benefits gross revenue was up 12% to $25.9 billion, Health Services Segment (Pharmacy Services) gross sales were up 13% to $44.6 billion, and Pharmacy & Consumer Wellness (Retail) gross sales were up 8% to $27.9 billion. This rise in revenue can primarily be attributed to increased prescription volume, pharmacy claims, and price inflation.

The company’s medical benefits ratio increased 120 bps to 84.6%, and its adjusted operating margin declined 110 bps to 7.0% in Q1’23. The GAAP operating margin was down 100 bps to 5.4%. Our CVS Health Operating Income Comparison dashboard has more details. The earnings of $2.20 on a per share and adjusted basis were down 4% from $2.30 in the prior-year quarter, and this compares with our estimate of $2.10. The decline in earnings can be attributed to higher costs.

Although CVS posted upbeat Q1 results, it lowered its full-year outlook. It now expects its earnings to be between $8.50 and $8.70 on a per-share and adjusted basis, compared to its prior view of $8.70 to $8.90. This can be attributed to costs related to its recent acquisitions – Signify Health and Oak Street Health. This did not sit well with investors, as evident from the stock price correction. Note that CVS stock is down 25% year-to-date, being weighed down 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. The investors were concerned about its impact on earnings, resulting in a sharp fall in CVS stock. In fact, we believe that CVS’ 2023 earnings will likely be toward the lower end of its revised range, and it will probably miss its 2024 target of $10 per share.

Looking at the stock price, we estimate CVS Health’s Valuation to be $103 per share, a significant 47% above the current market price of $70. At its current levels, CVS stock is trading at 8x its expected forward earnings of $8.58 on a per share and adjusted basis for full-year 2023, compared to the last two-year average of a little over 11x, implying that it is currently undervalued.

Although there are uncertainties about its Medicare business in 2024, CVS has successfully transformed from a retail pharmacy to a broader healthcare provider. With its recent acquisitions, it can look forward to the expansion of margins and better earnings growth in the coming years. As such, a slight rise in the P/E multiple is justified. Investors will likely be better off buying CVS stock in the current dip for solid long-term gains.

While CVS stock is undervalued, in our view, 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.

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Target vs. Emergent Biosolutions.

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