Should You Buy CVS Health Stock Over This Retailer?

We believe that CVS Health stock (NYSE: CVS) currently appears to be an attractive pick over its peer Walmart stock (NYSE: WMT), due to its comparatively lower valuation and better growth prospects. CVS trades at about 0.5x trailing revenues, compared to 0.7x for WMT. Although both the companies saw a rise in revenue over the recent quarters, the growth has been better for CVS, aided by the overall economic recovery and an increased contribution from Covid-19 vaccine administration.

Looking at stock returns, CVS, with 30% returns over the last six months, has significantly outperformed WMT, which is up around 1%, and it has also outperformed  the broader markets, with a 7% rise for the S&P500 index. However, there is more to the comparison, and we believe that CVS stands out with much higher expected returns compared to WMT, as we discuss in the sections below.  We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis CVS Health vs Walmart: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. CVS Health’s Revenue Growth Has Been Stronger

• Both companies managed to see sales growth over the recent quarters, but CVS Health has witnessed a comparatively faster revenue growth over the recent quarters. Looking at a longer time frame, CVS Health’s sales have jumped from $185 billion in 2017 to $285 billion over the last twelve months, while Walmart’s revenues have risen from $486 billion to $472 billion over the same period.
• Note that CVS Health’s revenue growth has been aided by its Aetna acquisition in 2018, while Walmart’s recent revenue growth is adversely impacted by divestiture of Asda and Seiyu business in Q1 FY22. The recent rise in CVS Health’s revenue can be attributed to a strong demand for vaccination. CVS Health is administering Covid-19 vaccines at its stores.
• Our CVS Health Revenues and Walmart Revenues dashboards provides more details on the company’s segments.
• Now, CVS Health’s revenue growth of 7.1% over the last twelve month period is better than 4.2% growth for Walmart, owing to the impact of the Covid-19 vaccines administration. Even if were to look at a slightly longer time frame, CVS Health has outperformed Walmart with its last three-year revenue CAGR of 14%, compared to just 4% for Walmart. But like we mentioned above, there were acquisitions and divestitures impacting these numbers.
• Looking forward, with the Omicron variant spreading across the globe, the demand for Covid-19 booster shots is on the rise, implying that CVS Health may benefit from vaccine administration in the near term.
• CVS Health’s revenue is expected to grow at a faster pace compared to Walmart. The table below summarizes our revenue expectation for CVS and WMT over the next three years, and points to a CAGR of 11% for CVS Health, compared to a CAGR of just 2% for Walmart.
• Note that we have different methodologies for companies negatively impacted by Covid, and for companies not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively impacted by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate, and beyond the recovery point, we apply average annual growth observed in the three years prior to Covid to simulate return to normal conditions. For companies registering positive revenue growth during Covid, we consider average annual growth prior to Covid with certain weight to growth during Covid and the last twelve months.

2. CVS Health Is More Profitable But Comes With Higher Risk

• CVS Health’s operating margin of 4% over the last twelve month period is much better than just 1% for Walmart.
• Even if we were to look at the recent margin growth, CVS Health stands ahead, with last twelve month vs last three year margin change at 0.6%, compared to -2.5% for Walmart.
• It should be noted that Walmart’s net margins were adversely impacted due to a one-off loss of $1.0 billion on the sale of Walmart Argentina in Nov 2020.
• Looking at financial risk, Walmart beats CVS Health. Walmart’s 9.5% debt as percentage of equity is much lower than CVS Health, and its 6.6% cash as percentage of assets is higher than 5.5% for CVS, implying that Walmart has a better debt and cash position.

3. The Net of It All

• We see that the revenue growth as well as profitability has been better for CVS Health and it is available at a lower valuation compared to Walmart. However, Walmart offers lower risk compared to CVS Health.
• Now, looking at future prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe CVS Health is currently the better choice of the two. The table below summarizes our revenue and return expectation for CVS and WMT over the next three years, and points to an expected return of 23% for CVS over this period vs. -1% expected return for WMT, implying that investors are better off buying CVS over WMT, based on Trefis Machine Learning analysis – CVS Health vs Walmart – which also provides more details on how we arrive at these numbers.
• Note that Covid-19 is proving more difficult to contain than initially thought, due to the spread of more contagious virus variants, and infections in many geographies, including the U.S. and Europe, are higher than what they were a few months back. The concerns around Omicron have spooked the markets at large. If this recent large spike in Covid-19 cases from the new variant that we are witnessing now, results in a disruption in economic growth, it will adversely impact the revenue growth for several companies, including CVS Health and Walmart.

While CVS stock may outperform WMT, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Walmart vs. Ingevity.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

[1] Month-to-date and year-to-date as of 1/19/2022
[2] Cumulative total returns since the end of 2016

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