What’s Driving The Growth For CVS Health Stock?

CVS: CVS Health logo
CVS Health

After over a 12% fall year-to-date, at the current levels, we believe CVS Health stock (NYSE: CVS) can see higher levels. CVS stock fell from $104 in early January to $91 now. The YTD -12% return for CVS marks an outperformance with -22% returns for the broader S&P500 index.

Looking at the longer term, CVS stock is up 39% from levels seen in late 2018. This marks an underperformance compared to some of its peers and the broader markets, with UnitedHealth stock and Target stock both rising 2x, and the S&P 500 index rising 51% over the same period. However, CVS stock returns were better than its closest peer – Walgreens stock – which is down 41% over the same period. Our dashboard – Why CVS Health (CVS) Stock Moved – provides more details on the factors behind this move over the last three years.

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This 39% rise for CVS stock over the last three years was primarily driven by: 1. CVS Health’s revenue, which grew 54% to $300 billion currently, compared to $195 billion in 2018. This was partly offset by 2. the company’s P/S ratio, which declined slightly but remained at around 0.4x, and 3. a 26% rise in its shares outstanding to 1.3 billion from 1.0 million in 2018. This has meant that the company’s revenue per share grew 22% to $228 from $187.

The revenue growth over the recent past has been led by a very high demand for Covid-19 testing and vaccine administration. Also, the Aetna acquisition bolstered CVS’ sales in 2019. Even during the pandemic, CVS has seen steady growth in all of its businesses – pharmacy services, retail pharmacy, and health care benefits. The company’s health care benefits segment has seen an 18% rise in revenue between 2019 and 2021, led by a rise in total medical membership, which currently stands at 24.5 million, compared to 22.9 million in 2019. This trend is expected to continue over the coming years, given the aging U.S. population.

Now, with the worst of the pandemic likely behind us, the economies have seen a recovery, and the fact that 67% of the U.S. population is fully vaccinated, the demand for Covid-19 testing as well as its vaccine administration is expected to decline, weighing on the overall revenue growth for CVS over the next few quarters. However, the company’s other businesses – including pharmacy services and health care benefits, are expected to grow steadily.

CVS stock faces headwinds from the current weakness in broader markets. The S&P500 has now entered the bear market territory with rising concerns of slowing economic growth given the high inflation, Fed action, and supply chain disruptions. That said, we estimate CVS Health’s valuation to be $116 per share, reflecting a 27% upside from its current market price of $91, implying that investors may be better off using the recent dip to enter CVS stock for gains in the long run. Our valuation is based on a forward P/E ratio of a little under 14x based on our earnings forecast of $8.40 on a per share and adjusted basis for full-year 2022. This compares with an over 12x figure seen at the end of 2021.

While CVS stock is likely to see higher levels, it is helpful to see how CVS Health’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, 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 Target vs. Emergent Biosolutions.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Jun 2022
MTD [1]
YTD [1]
Total [2]
 CVS Return -6% -12% 16%
 S&P 500 Return 0% -22% 84%
 Trefis Multi-Strategy Portfolio -9% -26% 190%

[1] Month-to-date and year-to-date as of 6/23/2022
[2] Cumulative total returns since the end of 2016

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