CVS Health (CVS) is an American pharmacy chain with additional offerings in health care insurance benefits. I am bullish on the stock.
Consumer Outlook
The financial markets are really just a pattern that reflects consumer spending cycles that are driven by macroeconomic circumstances. CVS sells a variety of healthcare and consumer staple products that shoppers consider daily necessities.
Considering U.S. inflation has just hit a 40-year high in January (7.5%). It should be trivial to think that consumer spending on discretionary items will slow down soon.
This could play into CVS’s advantage, as investors will likely seek out companies whose sales remain consistent, and the pharmacy giant will probably be one of them.
An additional factor worth considering is the firm’s market position. CVS has established itself as a market leader, meaning that it yields significant pricing power over consumers as well as bargaining strength over its suppliers.
Investors generally seek companies with resilient earnings and robust business models during trying economic times, and CVS stock thus aligns with the current market outlook.
Valuation
Valuation needs to be considered in tandem with the business cycle. I’ve already spoken of the consumer cycle and why I believe that healthcare and consumer staples will outperform other sectors for the foreseeable future.
It’s thus prudent to compare CVS’s valuation multiples to its peer group rather than their normalized five-year averages. By assuming this vantage point, it’s clear that the stock is undervalued. It’s trading at a price-to-earnings discount of 43.7% (non-GAAP), a price-to-sales discount of 91.7%, and a price-to-cash flow discount of 60.4%.
Furthermore, CVS stock has formed an attractive momentum pattern. The stock is trading above its 100-, and 200-day moving averages, with its RSI remaining stable around the 44 mark.
Wall Street’s Take
Turning to Wall Street, CVS has a Strong Buy consensus rating, based on 17 Buys and three Holds assigned in the past three months.
The average CVS stock price target of $117.79 implies 14.2% upside potential.
Concluding Thoughts
CVS will likely continue to benefit from a shift in the consumer cycle. The stock remains undervalued relative to its peers, conveying its strong market position.
In addition, the stock has formed an attractive momentum pattern, suggesting that the broader market remains bullish on the stock.
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