Is CVS Health Stock A Better Pick Over This Retailer?

We believe that CVS Health stock (NYSE: CVS) currently appears to be an attractive pick over its peer Target stock (NYSE: TGT) due to its comparatively lower valuation and better prospects. CVS trades at about 0.5x trailing revenues, compared to 0.9x for TGT. 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 21% returns over the last six months, has significantly outperformed TGT, which is down around 8%, and it has also topped the broader markets, given a 4% fall for the S&P500 index. However, there is more to the comparison, and we believe that CVS stands out with much higher expected returns than TGT, as discussed 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. Target: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Target’s Revenue Growth Has Been Stronger

• Both companies managed to see sales growth over the recent quarters, but Target has witnessed comparatively faster revenue growth of 17% over the last twelve months, compared to 7% for CVS Health. Looking at a longer time frame, CVS Health’s sales have jumped from $194 billion in 2018 to $285 billion over the last twelve months, while Target’s revenues have risen from $75 billion to $103 billion over the same period.
• Target saw an increase in spending in attractive categories like apparel, toys, and home furnishings. The company has also benefited from its drive-up, pickup in-store, and same-day delivery via Shipt services.
• For CVS Health, the revenue growth was partly driven by increased demand for Covid-19 testing and vaccine administration in 2020 and 2021.
• Our CVS Health Revenues and Target Revenues dashboards provide more details on the company’s segments.
• Looking forward, CVS Health’s revenue is expected to grow at a faster pace compared to Target. The table below summarizes our revenue expectation for CVS and TGT over the next three years and points to a CAGR of 11% for CVS Health, compared to a CAGR of just 2% for Target.
• 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 affected by Covid, we consider the quarterly revenue recovery trajectory to predict recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed in the three years before Covid to simulate return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a 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 2.5% over the last twelve-month period is in-line with 2.3% for Target.
• If we look at the recent margin growth, both the companies have seen a decline, but CVS Health is slightly better, with the last twelve months vs. last three-year margin change at -2.5%, compared to -4.6% for Target.
• Looking at financial risk, Target beats CVS Health. Target’s 13.2% debt as a percentage of equity is much lower than 42.4% CVS Health, and its 10.6% cash as a percentage of assets is higher than 5.5% for CVS, implying that Target has a better debt and cash position.

3. The Net of It All

• We see that the revenue growth has been better for Target, and it comes with lower risk. On the other hand, CVS Health is available at a lower valuation than Target.
• Now, looking at 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 TGT over the next three years and points to an expected return of 25% for CVS over this period vs. -9% expected return for TGT, implying that investors are better off buying CVS over TGT, based on Trefis Machine Learning analysis – CVS Health vs. Target – which also provides more details on how we arrive at these numbers.

While CVS stock may outperform TGT, 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 3/7/2022
[2] Cumulative total returns since the end of 2016

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