Is CVS Health Oversold At $63?

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CVS Health’s stock (NYSE: CVS) has lost 15% of its value year-to-date, currently trading at levels of around $63. While the stock fell close to 30% to about $52 as the markets collapsed in March, it has risen by 21% from those lows.

Why? While the Covid-19 outbreak and associated lockdowns resulted in an uncertain outlook for the broader markets, the multi-billion-dollar Fed stimulus announced in late March helped the markets stage a strong recovery. Investors are now expecting a quicker economic rebound, which will bode well for CVS Health. In addition, higher unemployment rates will also benefit CVS Health’s insurance business with an increase in its Medicaid enrollments.

But is this all there is to the story?

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Not quite. Despite the recent rally, Trefis estimates CVS Health’s Valuation at about $87 per share, roughly 38% above the current market price based on two key opportunities.

The first opportunity we see is to CVS Health’s near-to-medium term revenue growth. With the economy barely limping back to normalcy following Covid-19 related shutdowns, and unemployment at multi-decade highs in the U.S., the health insurance enrollments are expected to increase. Also, CVS will benefit from postponement of elective surgeries, as it has to bear the costs of such surgeries. Though this benefit could be limited to a couple of quarters. Beyond health insurance, the company did see a surge in retail sales in March due to stocking up of essentials in the wake of lockdowns being imposed. While this was a temporary boost as well, it will bolster to CVS’s 2020 revenue growth.

CVS Health reported an 8% jump in revenues in Q1 2020, primarily led by higher sales due to stocking up. The adjusted earnings grew 18% led by margin expansion. The company maintained its full year guidance for EPS to be in the range of $7.04 and $7.17, reflecting a growth of less than 1% at the mid-point of the range.

We project that CVS Health’s gross revenue (before eliminations) will stand at about $314 billion for fiscal 2020, marking a decline of about 5% year-over-year. This compares with the growth rate of 8% in 2018, and 31% in 2019, though 2019 revenue growth reflects the full impact of the Aetna acquisition.

The second key opportunity stems from CVS Health’s low valuation multiple, compared to its own historical multiple over the recent years, as well as to its peer UnitedHealth. The stock now trades at under 9x its projected 2020 earnings per share of about $7.15. In comparison, to earn close to $7.15 per year from a bank, you’d have to deposit about $715 in a savings account today (assuming 1% interest rate), so about 100x desired earnings. At CVS Health’s current share price of roughly $63, we are talking about a P/E multiple of just under 9x, compared to 14x and 11x seen in 2017 and 2018, respectively. And we think a figure closer to 12x, which is slightly above the midpoint of the range seen in 2017-18, will be appropriate.

That said, there is a near term risk in the company’s prescription drugs business.

Given the current Covid-19 pandemic, most of the health care institutions are not attending to non-emergency cases. As a result, there has been a significant drop in people visiting doctors, and in turn, prescriptions issued. This will likely result in a drop in CVS Health’s prescription revenues, which accounted for 22% of the company’s total gross revenues in 2019. But, as economies gradually open up, and the risks associated with Covid-19 abates, there will be a huge backlog for hospitals to attend to, including the currently deferred elective surgeries. That said, the rebound in hospital visits and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting U.S. Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. The complete set of coronavirus impact and timing analyses is available here.

Looking for more insights on healthcare stocks in the current Covid-19 crisis? Look at: What Factors Drove 40% Change In UnitedHealth Group Stock Between 2017 And Now?and How UnitedHealth Gets To $330 Billion: Medicare Or Optum?

See all Trefis Price Estimates and Download Trefis Data here

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