What’s Next For CVS Health Stock After A Solid Q3?

CVS: CVS Health logo
CVS Health

CVS stock (NYSE: CVS) is up 15% in a month, outperforming the broader S&P500 index, up 6%. The rise in CVS stock can be attributed to the solid Q3 results it reported last week. Its top and bottom line were well above our estimates, driven by continued growth in total membership and a favorable medical cost ratio (improving 230 bps y-o-y). The company took a one-time charge of $5 billion to settle all opioid-related litigation.

CVS’ revenue of $81.2 billion reflected a 10% y-o-y rise. Sales were up around 10% each for Health Care Benefits and Pharmacy Services segments, and Retail segment sales were up 7%. Its earnings of $2.09 on a per share and adjusted basis were up 6% y-o-y, partly due to a 30 bps fall in adjusted operating margin. Given the strong momentum, the company raised its full-year earnings forecast to be in the range of $8.55 to $8.65 vs. its prior guidance of $8.40 to $8.60 on a per-share and adjusted basis.

CVS stock was weighed down last month due to a downgrade in its largest health insurance plan for Medicare patients, with 1.9 million members. The reduced rating implies the plan’s ineligibility for performance-based bonus payments from the government in 2024. The investors were concerned about its impact on earnings, resulting in a sharp fall in CVS stock. However, strong Q3 and a recovery in the broader markets have helped the stock rise.

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We maintain CVS Health’s Valuation to be around $125 per share, which is about 23% above the current market price of $102. This represents a 14x P/E multiple based on its expected EPS of $8.63 in 2022, compared to the 12x figure seen as recently as late 2021. We have assigned a slightly higher multiple, expecting robust earnings growth over the coming years, including the benefit from its recently announced acquisition of Signify Health – a home healthcare services company.

But What About The Near Term?

Now that CVS stock has seen a 15% rise in a month, will it continue its upward trajectory, or is a fall imminent? Going by historical performance, there is a slightly higher chance of an increase in CVS stock over the next month. CVS stock has seen a move of 15% or more 38 times in the last ten years. 21 of those resulted in CVS stock rising over the subsequent one-month period (twenty-one trading days). This historical pattern reflects 21 out of 38, or a 55% chance of a rise in CVS stock over the coming month. See our analysis on CVS Health Stock Chance of Rise for more details.

Calculation of ‘Event Probability‘ and ‘Chance of Rise‘ using the last ten years’ data

  • After moving 7.4% or more over five days, the stock rose on 43% of the occasions in the next five days.
  • After moving 10.2% or more over ten days, the stock rose in the next ten days on 42% of the occasions
  • After moving 15.2% or more over a twenty-one-day period, the stock rose on 55% of the occasions in the next twenty-one days.

This pattern suggests a higher chance of a rise in CVS stock over the next twenty-one days.

CVS Health (CVS) Stock Return (Recent) Comparison With Peers And S&P500

  • Five-Day Return: CVS highest at 7.4%; AMZN lowest at -7.0%
  • Ten-Day Return: CVS highest at 10.2%; AMZN lowest at -25.4%
  • Twenty-One Days Return: WBA highest at 20.3%; AMZN lowest at -20.8%

While CVS stock looks undervalued, 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 and recent market volatility have 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 Nov 2022
MTD [1]
YTD [1]
Total [2]
 CVS Return 7% -1% 29%
 S&P 500 Return -1% -20% 71%
 Trefis Multi-Strategy Portfolio -3% -24% 200%

[1] Month-to-date and year-to-date as of 11/9/2022
[2] Cumulative total returns since the end of 2016

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