I am neutral on CVS Health (NYSE: CVS) as its competitive positioning, growth potential, and overwhelming backing from Wall Street analysts are offset by its elevated valuation.
CVS Health is an American healthcare company founded in Massachusetts.
Strengths
CVS Health owns CVS Pharmacy, which is a chain of retail pharmacy stores, CVS Caremark that operates as a pharmacy benefits manager, and Aetna, a health insurance provider, among other brands.
The company is based in Woonsocket, Rhode Island, and is currently ranked fourth on the Fortune 500 list, and Fortune Global 500 list.
The company began as a chain of health and beauty aid stores and added pharmacies later. The company joined the Melville Corporation to aid growth and expansion.
Recent Results
In the third quarter of 2021, the company reported total revenues of $73 million, showing an increase of 10% since the same period last year, where total revenue stood at $67 million.
Adjusted EPS stood at $1.97 compared to last year’s $1.66, showing an 18.7% growth. The company paid a total of $659 million in shareholder dividends in the third quarter of 2021.
Cash flow from operations shows a significant growth in comparison to last year, with $5 million attributed to the third quarter of 2021, and $1 million to the same period last year.
The Healthcare Benefits segment accounts for $20 million of total revenues for the quarter, whereas Pharmacy Services account for $30 million and Retail accounts for $24 million. The Pharmacy segment shows an approximate 10% decline, while other segments show growth of approximately equal amounts.
During Q3 2021, the company repaid a net $1.1 billion of long-term debt and a total of $6.5 billion year-to-date.
To date, long-term debt of $18.7 billion has been repaid since the Aetna transaction was closed in 2019.
Total enterprise prescriptions for the quarter were estimated around 778, which is an approximate 7% increase since the previous year’s 728 prescriptions.
Valuation Metrics
CVS stock looks a bit pricey at the moment as its EV/EBITDA ratio is 10.5x which is elevated compared to its five-year average of 8.8x, and its P/E ratio is 12.5x which is also elevated compared to its five-year average of 10.5x.
Moreover, the forward dividend yield is 2%, which is well below its five-year average dividend yield of 2.9%.
Wall Street’s Take
From Wall Street analysts, CVS earns a Strong Buy analyst consensus based on 17 Buy ratings, three Hold ratings, and zero Sell ratings in the past three months. Additionally, the average CVS price target of $113.40 puts the upside potential at 12.7%.
Summary and Conclusions
CVS Health is a leading healthcare and pharmacy company and has positioned itself to thrive in the telemedicine industry thanks to its partnership with Teladoc (NYSE: TDOC).
As a result, the company could see solid growth for several years to come. Moreover, Wall Street analysts are nearly unanimously bullish on the stock here, and the average price target indicates solid upside over the next year.
On the other hand, the stock is priced at a premium relative to its recent historical multiple averages, and with interest rates and inflation on the rise, the stock may face headwinds moving forward.
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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