We believe that CVS Health stock (NYSE: CVS) is currently a better pick over its competitor Walmart stock (NYSE: WMT), given its better prospects and a comparatively lower valuation of 0.4x trailing revenues vs. 0.6x for Walmart. This valuation gap isn’t justified in our view, given CVS has better revenue growth and is more profitable.
Looking at stock returns, CVS, with -1% returns so far this year, has fared better than WMT stock, which is down 5%, and both have outperformed the broader S&P500 index, down 15% over this period. There is more to the comparison, and in the sections below, we discuss why we believe CVS stock will offer better returns than WMT stock in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis of CVS Health vs. Walmart: Which Stock Is A Better Bet? Parts of the analysis are summarized below.
1. CVS Health’s Revenue Growth Is Better
- Both companies managed to see sales growth over the recent quarters. Still, CVS’ 10.6% revenue growth over the last twelve months fares better than 3.8% for Walmart.
- Looking at a longer time frame, CVS Health’s sales have risen at an average annual growth rate of 15.1% to $292 billion in 2021, compared to $195 billion in 2018, while Walmart saw its sale grow at an average rate of 3.7% to $573 billion in fiscal 2022 (Walmart’s fiscal ends in Jan), vs. 514 billion in fiscal 2019.
- CVS Health’s revenue growth has been aided by its Aetna acquisition in 2018, while Walmart’s revenue growth was adversely impacted by the divestiture of Asda and Seiyu business in Q1 FY22.
- CVS’ revenue growth since the beginning of the pandemic was driven by increased demand for Covid-19 testing and vaccine administration.
- 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 24.4 million, compared to 22.9 million in 2019. This trend is expected to continue over the coming years, given the aging U.S. population.
- While CVS is expected to see a decline in revenue from Covid-19 testing and vaccine administration, its other businesses, including pharmacy services and health care benefits, are expected to grow steadily.
- Walmart’s revenue growth over the recent past is being driven by increased consumer spending on groceries and other necessities. Walmart’s wide offering and focus on cost-conscious shopping will likely help it thrive in a high inflationary environment.
- Our CVS Health Revenues and Walmart Revenues dashboards provides more details on the company’s segments.
- The table below summarizes our revenue expectation for both companies over the next three years and points to a CAGR of 10.7% for CVS, compared to a CAGR of 1.9% for Walmart.
- Note that we have different methodologies for companies negatively impacted by Covid and those 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 three years before Covid to simulate a 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 Is More Profitable
- CVS’ operating margin of 5.0% over the last twelve-month period is better than 3.3% for Walmart.
- This compares with 5.8% and 4.2% figures seen in 2019 (fiscal 2020 for Walmart), before the pandemic, respectively.
- CVS’ 6.0% free cash flow margin is better than 3.6% for Walmart.
- Our CVS Health Operating Income and Walmart Operating Income dashboards have more details.
- Looking at financial risk, both are comparable. CVS’ 40.9% debt as a percentage of equity is higher than 12.2% for Walmart, but its 6.5% cash as a percentage of assets is slightly higher than 5.6% for the latter, implying that Walmart has a better debt position, and CVS has more cash cushion.
3. The Net of It All
- We see that the historical revenue growth, profitability, and cash cushion are better for CVS. It is also trading at a comparatively lower valuation. On the other hand, Walmart has a better debt position.
- Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe CVS is currently the better choice of the two.
- The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 27% for CVS over this period vs. a 0% expected return for Walmart stock, 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.
While CVS stock may outperform WMT, 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 at how counter-intuitive the stock valuation is for Lowe’s vs. Amerco.
With inflation rising and the Fed raising interest rates, among other factors, CVS stock has seen a 1% drop this year. Can it drop more? See how low CVS Health stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.
|S&P 500 Return||3%||-15%||82%|
|Trefis Multi-Strategy Portfolio||5%||-12%||250%|
 Month-to-date and year-to-date as of 9/12/2022
 Cumulative total returns since the end of 2016