CVS Health (CVS) is an American pharmacy chain with additional offerings in health care insurance benefits. I am bullish on the stock. (See Analysts’ Top Stocks on TipRanks)
Closing Down 300 Pharmacy Outlets
Between Q3 2020 and Q3 2021, CVS’ pharmacy sales to CapEx comparison has been quite respectable, as year-over-year sales grew by 9.2% while CapEx decreased by 11.1%.
Although the data shows signs of progress, CVS thinks it can amplify its financial efficiency even more and has decided to close down 300 store locations over a three-year horizon.
The reason for this decision is to reduce operating costs and amplify sales via digitalization after using the lockdown as a trial in which it found no error. It will be necessary for CVS to sustain its in-store presence in certain locations, but with online sales outgrowing in-store sales in other areas, the broader decision seems like a no-brainer.
Insurance Segment
The insurance segment, which caters to lower and medium-income households, is a significant value add as an integration play.
CVS Health’s membership rose by 1.7% year-over-year, led by a 9.5% government increase. Total revenue subsequently increased by 9.5%, and adjusted operating income increased by 2.4%.
A slightly concerning matter is the 180 basis point increase in CVS’s medical benefit ratio (85.8%), sending it over the efficient frontier of 85%. I think this remains a temporary issue as the ratio’s increase has primarily been due to investment reasons rather than a lack of efficiency.
Adding substance to the argument would be the fact that CVS anticipates the ratio to retrace to 84.7% for the fiscal year.
Valuation and Dividends
CVS is undervalued relative to its peers. The company is trading at a PE discount of 50.7%, and its stock price is currently lagging sales growth by 2.3x.
Additionally, dividends remain attractive. A forward yield of 2.15% is accompanied by the prospect of dividend payout growth, as the firm’s cash payout ratio is currently 35.3% below its five-year average.
Wall Street’s Take
The majority of Wall Street remains adamant that CVS stock is set for a bull run. The company has a Strong Buy consensus rating, based on 14 Buys and two Holds assigned in the past three months. The average CVS price target of $108.94 implies 15.7% upside potential.
Concluding Thoughts
CVS is streamlining its retail business model in tandem with improving its insurance segment, which could further bolster operating income. The stock is undervalued, and surplus dividend payout capacity remains in play.
Disclosure: At the time of publication, Steve Gray Booyens had a long position in CVS.
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