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CVS Health: Robust, or Overvalued?

I am neutral on CVS Health (CVS) because Wall Street’s bullishness on the stock and its recently raised guidance are offset by valuation multiples that indicate the stock is trading at a premium to historical averages.

CVS Health is an American healthcare organization that owns the CVS Pharmacy. The company delivers health care in innovative ways all across the country for managing chronic diseases, ensuring medication compliance amongst patients, and providing easy access to affordable healthcare.

See CVS website traffic on TipRanks >>

Strengths of CVS

CVS Health delivers innovative care to Americans through its physical locations, online channels, and network of 300,000 colleagues that includes over 40,000 physicians, nurses, and pharmacists. The company has a strong record of delivering strong and consistent results that exceed expectations.

Over the last four quarters, the company successfully exceeded the consensus estimates for earnings per share four times. During Q2 2021, the company administered almost 17 million COVID-19 vaccines as well as performed over six million tests.

Recent Results

According to its Q2 2021 report, the total revenue of CVS Health was up by 11.1% year over year and reached $72.6 billion. The increase was attributed to growth in all segments. The earnings were $2.42 per share as compared to the $2.06 expected by analysts.

Operating income saw a decrease of 7.6%, and adjusted operating income saw a decrease of 8.3% for the second quarter ended June 30, 2021, compared to the same period’s results in the previous year. The change was due to normalized levels of utilization in the Health Care Benefits segments after a period of considerable decrease in utilization, due to the effects of the global pandemic during Q2 2020.

The decrease in the operating and adjusted operating income in the second quarter of 2021 was offset partially by a return of higher volume in the front store, and increased prescription, the coronavirus vaccination, and testing in the Retail/LTC segment. It was also aided by improved purchase economics and use of healthcare benefits in the Pharmacy Services segment in Q2 2021, as people resumed medical visits.

In light of the positive results, CVS Health raised its 2021 guidance range for GAAP diluted earnings per share from $6.24 and $6.36 to $6.35 to $6.45, and its adjusted earnings per share guidance range from $7.56 to $7.68 to $7.70 to $7.80.

Valuation Metrics

CVS Health’s stock looks overvalued right now as its EV/EBITDA ratio, Price to Normalized Earnings ratio, and Price to Free Cash Flow ratio each indicates the stock is trading above its historical average.

The EV/EBITDA ratio is currently 10.14x compared to its 5-year average of 8.69x, the Price to Normalized Earnings ratio is currently 11.23x compared to its 5-year average of 10.52x, and the Price to Free Cash Flow ratio is currently 10.79x compared to its 5-year average of 9.91x.

CVS Website Traffic

According to TipRanks’ website traffic tool, CVS’s website has seen an 8.93% increase in traffic, quarter-over-quarter. The vast majority of visits to the website for CVS are from the United States.

Summary and Conclusions

CVS Health is certainly well-liked on Wall Street at the moment, as the share price has seen strong performance over the past year. Analysts maintain their overwhelmingly bullish outlook, with 10 out of 11 rating it a Buy and the consensus price target leaving meaningful upside for the stock. Management’s recent increase of annual guidance adds further weight to the bull case.

That said, the stock does look a bit expensive compared to its historical valuation multiples after its strong run over the past year, so investors might want to wait for a pullback before buying shares.

Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.

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