CVS Health Corporation (CVS) is a diversified health services behemoth, serving its customers through more than 9,000 retail locations and more than 1,100 walk-in medical clinics. CVS is one of the most prominent pharmacy benefits managers, featuring around 110 million plan members.
The company also serves roughly 35 million people via traditional, voluntary, and consumer-directed health insurance products and matching services, such as expanding Medicare Advantage offerings and a well-known standalone Medicare Part D prescription drug plan.
While a great number of equities have suffered greatly over the past several months amid the market’s overall sell-off, shares of CVS have held their ground relatively well. Specifically, CVS stock is currently up 14% in the past 12 months, while the S&P 500 (SPX) has declined 11.4% over the same period.
This is due to the company operating a recession-proof and necessity-type business model, which allows it to produce resilient cash flows through times of uncertainty, like the current one.
In fact, the company’s revenues and net income were barely affected during the pandemic, while net income is expected to reach a new all-time high on a per-share basis this year.
With uncertainty persisting on a global scale, investors have flocked to CVS’s relatively safer investment case. Despite the stock’s rally over the past year as a result of investors’ interest migration, shares appear rather reasonably valued.
Thus, there could be more room for the stock to rally higher, moving forward. Still, as the majority of the “easy gains” have likely already been made, I remain neutral on the stock.
Resilient Performance
CVS’s Q1-2022 results came in rather strong, with revenues growing 11.2% to $76.8 billion. Profitability also improved notably, with adjusted EPS reaching $2.22 compared to $2.04 in the comparable period last year.
Revenue growth was driven by 8.6% sales growth in CVS’s Pharmacy Services, primarily powered by raised pharmacy claims volume, growth in specialty pharmacy, and brand inflation.
This greatly illustrates both CVS’s ability to remain unaffected by elevated inflation levels and its potential to even benefit from higher pricing due to pharmaceuticals being a necessity for consumers.
The Retail/LTC division, which fulfills prescriptions for medications, provides patient care programs, and sells a broad mixture of health and wellness products, also performed strongly. Total revenues rose 9.2% in the latest quarter, mainly driven by higher prescription and front-store volumes.
In fact, total same-store sales in CVS’s Retail segment increased 10.7%, with pharmacy sales expanding 10.1%, prescription volumes growing 6.1%, and front-store sales increasing by 13.2%. The company also posted total year-over-year membership growth of 3.8% to 24.5 million. Overall, these metrics once again demonstrate just how sturdy CVS’s operations and results can be even during the most uncertain times.
With healthy market dynamics benefiting CVS these days, its upcoming earnings should also display solid numbers. The company revised its Fiscal 2022 GAAP diluted-earnings-per-share guidance range to $6.93 to $7.13, from $7.04 to $7.24 previously.
Despite the lowered guidance, the midpoint of $7.03 implies a new all-time high EPS for the company, surpassing Fiscal 2017’s record of $6.48.
Impressive Capital Returns
CVS hasn’t trimmed its dividend in more than 25 years. That said, dividend-per-share increases have only arisen whenever the company arrives at a new, higher profitability plateau to make sure that payouts are invariably well-covered.
After paying a steady dividend from the start of Fiscal 2017 to the end of Fiscal 2021, CVS announced a 10% dividend hike heading into Fiscal 2022 to a quarterly rate of $0.55.
This was great news, as it solidified investors’ confidence in the dividend and the company’s ability to grow it over time. The midpoint of management’s guidance implies a payout ratio of 31.3%, which could sustain another hike in Fiscal 2023.
The company has taken advantage of its improved profitability lately to repurchase a large chunk of shares as well. In Q1 alone, the company repurchased $2 billion worth of stock.
Wall Street’s Take
Turning to Wall Street, CVS has a Moderate Buy consensus rating based on eight Buys and five Holds assigned in the past three months. At $117.00, the average CVS stock forecast implies 24.55% upside potential.
Takeaway – A Safe, Reasonably Valued Investment
CVS enjoys a recession-proof business model, which allows the company to generate robust cash flows even during unfavorable trading environments. The company’s recent performance has displayed this quality lately, while earnings per share are set to hit a new all-time high this year.
Despite the stock’s rally over the past year, it is currently trading close to 13.4 times the midpoint of management’s guidance, which is a rather reasonable multiple considering that CVS provides a sanctuary to investors during the ongoing turmoil.
Still, shares are not particularly cheap, which means that if earnings were to decline moving forward as a result of higher expenses, the margin of safety is not fantastic. Nonetheless, the company should remain a compelling long-term investment.
