I am neutral on CVS Health Corporation (CVS), as it has strong support from Wall Street analysts and an average price target that implies decent upside potential. That said, the valuation multiples look stretched and the growth outlook is pretty weak.
CVS Health Corporation is an American health solutions company founded by Stanley and Sidney Goldstein and Ralph Hoagland in Massachusetts in 1963. Since its inception, it has evolved into one of the largest healthcare solutions providers in the U.S. It operates CVS Pharmacy, CVS Caremark, and Aetna under the CVS Healthcare Corporation umbrella. The company is headquartered in Woonsocket, Rhode Island, and became publicly available to trade on the New York Stock Exchange in 1996.
Strengths
CVS is a healthcare giant because it operates not only its retail pharmacy chain, but also a pharmacy benefits manager and a health insurance provider. Because of its acquisition of Aetna, CVS has a stronghold in the insurance industry and can manage healthcare costs more efficiently. It also has a more integrated approach to healthcare services because of this. It should also be noted that CVS Health ranks fourth on the Fortune 500 list and seventh on the Global 500 lists in 2021.
Additionally, CVS Health has been at the forefront of the COVID-19 pandemic and became the biggest private provider for COVID-19 testing. In Q3 of 2021 alone, it has administered 8 million+ COVID-19 tests and 11 million+ COVID-19 vaccines.
Recent Results
CVS Health Corporation’s revenue in Q3 of 2021 showed a revenue of $73.8 billion. This figure showed a 10% increase from the previous year’s Q3 revenue, which came in at $67 billion. Because of this, the year’s total revenue came to $215.5 billion, which was 8.2% higher than the total revenue from 2020. Additionally, there was an increase in adjusted EPS, which came to $1.97 after an increase of 18.7%.
It should also be noted that the company paid back $1.1 billion in long-term debt while still managing to return dividends of $659 million to shareholders during Q3 of 2021.
Valuation Metrics
CVS stock looks expensively priced at the moment. Its enterprise value to EBITDA ratio is elevated relative to its history at 10.75 times compared to its historical average of 8.78 times.
Furthermore, its price to normalized earnings ratio is 12.95 times, compared to its historic average of 10.44 times.
Analysts expect the company to see revenue, EBITDA, and normalized earnings-per-share growth in 2022 of 5.4%, 2.3%, and 0.4%, respectively.
Wall Street’s Take
According to Wall Street analysts, CVS earns a Strong Buy analyst consensus based on 20 Buy ratings, three Hold ratings, and zero Sell ratings in the past three months. Additionally, the average CVS price target of $114.59 puts the upside potential at 7.88%.
Summary and Conclusions
CVS Health is a leading healthcare company with an extensive network of pharmacies located strategically. Additionally, it has formed strategic partnerships and is offering services that have given it numerous opportunities for growth and strengthened its network advantage while simultaneously leveraging its economies of scale.
On top of that, Wall Street analysts are overwhelmingly bullish on the stock, and the average price target implies decent upside over the next year. On the other hand, the valuation multiples look stretched relative to the company’s history, and growth expectations for 2022 are fairly muted. As a result, investors might want to wait for a pullback in the share price before initiating a position.
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